On two successive days last week, the FSA issued guidance consultation on product design. The guidance covers both general insurance (payment protection products) and investments (structured products). The new Financial Services Bill when it is enacted will give the FCA new product intervention powers, but these two guidances indicate the FSA considers its existing powers enable it to give a strong steer as to what it requires from firms. What is remarkable, on such totally different products, is the similarity in the FSA’s guidance. The FSA appears to be resurrecting its TCF statements of expectation.
For years the focus has been on mis-selling by advisers selling unsuitable products, but these guidances are both focused on the processes followed by product providers rather than the steps taken by intermediaries to determine the suitability of products. The FSA’s key focus is on the governance processes used to design and decide on the sale of products. The starting point in every case should be to identify the target market, and the FSA believes there is a “strategic failure” at the moment: firms should be considering “What do consumers need and want? How can we make it?” as opposed to “What can we make? How can we persuade consumers to buy it?”
Identifying the target market should be done with the benefit of consumer research on consumer demands and needs. The firm must then ensure that its sales are to the intended target market. Better than expected sales should not be viewed by firms as a success story, but rather an alarm bell that it may be selling the product to people for whom it was not intended. The product features should be understandable to their intended audience, although there is a recognition that what needs to be understandable is the product features that will be visible to the consumer, not necessarily the financial engineering beneath the surface.
Back in 2006 the FSA identified six outcomes for consumers to ensure customers were treated fairly – including that products and services were designed to meet the needs of identified consumer groups and targeted accordingly, and that products perform as firms have led them to expect. These TCF outcomes are the foundation of the FSA’s latest consultation papers.
The new Financial Services Bill will give the FCA the power to ban a specific product but before that power comes into force the FSA is clearly focusing on what it perceives as high risk products.