The Financial Conduct Authority (“FCA”) has already made it clear that, in responding to threats relating to financial markets, will tolerate lower levels of risk than its predecessor, the FSA, seeking to act faster and at an earlier stage, in order to manage issues that could harm both consumers and the integrity of the market.6
During the course of 2011, the FSA published a discussion paper and feedback statement setting out a number of possible product interventions that may form the basis of the FCA’s approach to retail financial services.7 In December 2012, the FSA released a consultation paper (the “Consultation”)8 setting out a draft FCA Statement of Policy, further clarifying its proposed rules on product intervention. More recently, in March 2013, the FSA published a revised policy statement (the “Statement”),9 summarising the responses received in respect of the Consultation and amending (where necessary) the December FCA Statement of Policy. This article summarises the final FCA approach formulated in the light of market input.
Legal basis for the Statement
The Financial Services and Markets Act 2000 (“FSMA”) (as amended by the Financial Services Act 2012) provides (at Section 138I) that the FCA should consult the new Prudential Regulation Authority (“PRA”), and thereafter the public, with respect to any permanent rules that it makes to enhance consumer protection and provide a cost/benefit analysis in respect of the proposed rules. Although launched by the FSA in August 2012, before it was disbanded, this approach can already be seen in the first product intervention consultation in relation to possible restrictions on the marketing of unregulated collective investment schemes and close substitutes to certain retail investors.10
However, Section 138M provides that in circumstances where it is necessary or expedient for the FCA not to comply with these requirements for the sake of consumer protection, it can create ‘temporary’ product intervention rules. Such rules are temporary insofar as they are not permitted to remain in existence in excess of 12 months from the date upon which they come into force. During that time, the FCA can decide whether or not to implement permanent product intervention rules. However the 12 month limit on the temporary rules cannot be extended. In accordance with Section 138N, the FCA is required to prepare and issue a statement of policy with respect to the making of temporary product intervention rules (which statement of policy has now been published in the form of the Statement).
When might product intervention rules be necessary?
The FCA provides a number of details in the Statement relating to the circumstances when it may or may not be appropriate to institute product intervention rules. The relevant factors are divided into 4 main categories of considerations:
- General Considerations: These include (amongst others), whether any rules provide an appropriate means of addressing actual or potential consumer detriment, whether they are proportionate, deliverable, transparent and whether they can be supported by sufficient and appropriate evidence.
- Contextual Considerations: These include (amongst others), the potential scale of the detriment in relation to the market and individual consumers, the social and market context (e.g., is there potential for vulnerable groups to be affected?) and any possible unintended consequences of an intervention.
- Competition Considerations: The FCA should bear in mind its objective to promote market competition. Accordingly, it should consider (amongst other things) whether the rules promote effective competition in the interest of consumers, or indeed whether they might have the reverse effect and have a negative impact on competition.
- Regulatory Principles: The FCA should also have regard to its fundamental regulatory principles set out at Section 3B of FSMA. These include (amongst others) the need for it to use its resources in an efficient and economic way, the desirability of sustainable growth in the UK and the general principle that consumers should take responsibility for their own decision-making.
How will product intervention rules be made?
Initial product intervention proposals will be discussed and a paper shall be prepared by a committee at the working group level (the “Committee”). The Committee will then either propose that the temporary product intervention rules be escalated to the Board of the FCA for review, or that they should be subject to further consideration. The FCA should discuss any proposed intervention rules (temporary or otherwise) with the PRA, in order to obtain receipt of its comments before taking any action. If the FCA Board elects to publish temporary rules based upon the proposals, it will publish them on its website and take any necessary further actions. Consideration should also be made of how affected firms and consumers should be informed of any new rules.11 The FCA is not under a duty to consult, but it should explain on its website why it has introduced any relevant new rules.
During the term of a temporary product intervention rule, the FCA may feel that it is appropriate to conduct a review of its impact. This might include liaising with market participants and affected stakeholders, product providers and/or consumers to obtain their feedback. Such review might consider the effectiveness of the temporary rule, including whether its implementation has resulted in any unintended consequences, whether there have been any breaches and whether there is sufficient evidence to suggest that market participants are side-stepping the rule by implementing workarounds.
To the extent necessary, the FCA can revise a temporary product intervention rule by communicating a new statement and a rationale for the amendments. The FCA can also publish further details explaining the way that a rule is intended to work, in order to clear up any market uncertainty.
The FCA is required to provide details of the relevant time limits that apply with respect to any temporary product intervention rules (subject to the maximum limit of 12 months). It is also able, however, to revoke temporary rules at any time. This might be because (amongst other reasons): new rules have been introduced at the EU level; it is in receipt of new evidence that the detriment which the rules were intended to alleviate no longer exists; the FCA becomes aware of certain unintended consequences of the rules; or new rules have been implemented on a permanent basis following a consultation period.
Appreciating that proposed regulatory reform relating to product intervention at the EU level is an ongoing process,12 the FCA highlights in the Statement that it will continue to provide its input with respect to any such negotiations, although it will of course re-consider its statement of practice to the extent that any of the provisions prove to be incompatible with any eventual EU legislation.
In its responses to market participants, the FCA has made clear that in most situations, it expects to consult on permanent rules in order to advance its statutory objectives. The FCA does not view the employment of temporary rules as a way of replacing its existing regulatory tools. Rather, it provides a mechanism to provide protection to consumers only where prompt action is required. Further, the FCA was keen to allay market concern that the banning of market products was an inevitable outcome. It has made clear that banning products is only one possible type of product intervention and its use would only be applied in very serious cases.