Under the Financial Services Bill (the 'Bill'), the incoming Financial Conduct Authority (the 'FCA') will have the power to make temporary product intervention rules. In preparation for this, the FSA has published a draft statement of policy (the 'Statement'), detailing how the FCA will exercise this power, the factors to which it will have regard and examples of when the use of this power may be appropriate.
The FCA will adopt a much more proactive and intrusive approach to financial services regulation; an approach far removed from the "light touch" regulation associated with the FSA. Following numerous scandals and considerable consumer detriment over recent years, intervention at the point of sale is no longer considered sufficient. In accordance with its "consumer champion" mandate, the FCA will advocate much earlier regulatory intervention in the life cycle of retail financial products. The proposed product intervention rules will allow the FCA to assess products much earlier in the design process, in order to efficiently and effectively regulate all aspects of a product's life cycle.
Temporary product intervention rules
The Statement confirms that the FCA will typically be required to consult with the public in advance of making any product intervention rules. However, where short term protection of consumers is needed quickly because the risk of consumer detriment is imminent, 'temporary' product intervention rules can be put in place without consultation. This means the FCA will be able to block the launch of certain products or prohibit any existing products or services. The FCA is likely to step in where a firm may be offering inherently flawed or unsuitable products, or where there is a strong risk of mis-selling.
The nature of these 'temporary' rules means that they will be limited in duration to a period of 12 months. According to the Statement, they will offer short term protection for consumers "while allowing either the FCA or the industry to develop a more permanent solution to address the source of detriment."
At any point during these 12 months the FCA may review or revoke the rule as it sees fit. At the end of the 12 months, the FCA is prohibited from making any further rules with the same, or substantially the same, provisions. This period of restriction, known as the prohibited period, will run for a further 12 months from the date of the expiry of the temporary rule.
Factors for consideration
When making temporary product intervention rules the FCA must consider a number of factors, as outlined in the Statement. It must consider whether the proposed temporary rule is:
- proportionate in relation to the potential detriment it is intending to prevent;
- effective as a means of addressing the identified consumer detriment;
- transparent in its operation; and
- beneficial for consumers.
More generally, the FCA will consider the scale of the potential detriment that the temporary rule will prevent. Popular products with a large customer base have the potential to cause much more widespread detriment and will therefore require swift product intervention. Equally, intervention will be more desirable where vulnerable consumer groups are at risk. The FCA must also carefully consider any unintended consequences of the proposed rule; for example, where the creation of the rule may itself cause further consumer detriment.
Annex 2 to the Statement states that the FCA must also have regard to the Principles of Good Regulation and any relevant EU considerations. This will become increasingly pertinent as more financial services regulation is developed at EU level. There are fears that the introduction of product intervention rules may put the UK at a competitive disadvantage if the FCA takes a more interventionist approach than other EU Member States. However, the FSA has said that the product intervention rules will take account of the EU developments, particularly with reference to the Markets in Financial Instruments Regulation and its proposals on packaged retails investment products (PRIPs). The FCA will also seek to promote a more interventionist approach at European level amongst the European Supervisory Authorities.
The rule-making process
Working groups within the FCA will have the responsibility of drafting the proposals for temporary product intervention rules. These will then be passed to the Board of the FCA for consideration. The Board will have the power to approve the rules or suggest a re-think where the use of another regulatory tool may be more appropriate in the circumstances. The Board also has the freedom to decide that no regulatory action is necessary.
According to the Statement, the FCA will seek the views of the Practitioner Panel, the Consumer Panel and the Small Business Practitioner Panel during the rule-making process, "where there is sufficient time to do so". This qualification has done little to quell fears that the temporary product intervention rules provide the FCA with too much power and will stifle innovation. It seems that, having identified a need for immediate action to protect consumers, the FCA can proceed virtually unchallenged with the creation and enforcement of temporary product intervention rules.
In the event that the Board decides to proceed, the temporary product intervention rule will be published on the FCA's website, along with a rationale to explain the reason for the rule.
The FCA will be able to review the rule at any time during its duration. If necessary, it can issue guidance on the application and operation of the rule, if it seems there is an uncertainty surrounding either of these aspects.
The rule may be revoked at any time before the end of the period for which it applies. This may be for a number of reasons including:
- the introduction of more permanent rules that have undergone the full consultation process;
- receipt of evidence to show that the anticipated detriment will not occur; or
- the demand for the product disappearing entirely, and being unlikely to return.
Given the lack of consultation required to implement a temporary product intervention rule, there are concerns that the FCA has too much freedom to use this power. The FCA could intervene to the extent that new products do not make it to market, and in so doing stifle innovation and product development. However, the FSA have given assurances that the use of this power will be regulated by a strong governance framework and will not be used lightly. To illustrate the potential benefits of the proposed product intervention rules, the FSA has also published a document providing examples of previous market issues where such rules could usefully have been employed.
The product intervention rules mirror the more general shift in regulatory approach to a more intrusive and intense system of supervision. The success of these rules, however, will depend on the FCA's ability to apply this new tool appropriately and proportionately.