On 25 January 2011, the FSA published an important discussion paper on product intervention (DP11/1) which considered how the FSA and its successor (the proposed Consumer Protection and Markets Authority (the “CPMA”)) will pursue its consumer protection objective and strategy. The paper sets out options for possible new requirements which will help to shape the CPMA’s regulatory philosophy.
The FSA’s key proposals cover:
- more prescriptive rules: the FSA proposed to introduce greater prescription in the current regulatory framework to help improve customer outcomes and strengthen it’s a ability to hold firms to account for product governance failings, which may include changing some of the FSA’s existing regulatory guide on the responsibilities of providers and distributors into rules; and
- additional product intervention: the FSA outlines the potential intervention options which could be adopted where it identifies products with features that have the potential to cause detriment to consumers, or that have potential to cause detriment due to firms’ flawed governance and distribution strategies, which include product pre-approval, the banning of products, mandating product features, price intervention, increasing prudential requirements on providers, consumer and industry warnings, preventing non-advised sales and additional competence requirements for advisers.
Whilst the discussion in DP11/1 relates to a broad range of financial products used by retail customers, including deposits, insurance products and mortgages, DP11/1 also raises the question of whether similar forms of intervention should be introduced in the governance of services, such as platforms and discretionary investment management services, although the FSA recognises that it would be necessary to adopt different approaches for different sectors to take account of market differences.
The FSA’s DP11/1 is a landmark publication as for the first time the regulator is setting out its approach to product regulation and, by implication, confirming that the CPMA will follow in its increasingly intrusive, intensive and interventionist footsteps with regard to customer protection. Much of DP11/1 illustrates how the FSA’s enhanced supervisory approach is already beginning to be applied to the product value chain. Firms are likely to find the increased oversight of their product governance process difficult to challenge. However, it is in the potential, more intrusive product banning and other regulatory powers that firms may wish to focus on in their responses to the FSA. For all the FSA has stated in DP11/1, it does not yet go so far to state that product pre-approval will be appropriate, although some of the other measures proposed come very close to that. Firms would be well advised to ensure that they engage in the debate of quite how interventionist the FSA (and in due course the CPMA) should be with regard to their products. Similar developments at the EU level, for example, in the context of MiFID review and the proposed Packaged Retail Investment Products directives are also now in progress.
The deadline for responses to DP11/1 is 21 April 2011. Responses to DP11/1 will be reflected in further papers which the FSA propose to publish during the first half of 2011 on its approach to the transition to regulation by the CPMA.