First HM Treasury consults on simple products, then the FSA on product regulation - what gives?
Hot on the heels of HM Treasury's consultation on simple products, the FSA has published its own discussion paper on product regulation. The two are said to be linked, but this linkage is not inherently obvious, apart from one worrying bit I mention at the end.
It is a remarkably strategic document that gives a comprehensive overview of what the FSA does at the moment and the options it has for the future, especially in extending its interventions at the product development stage. The dilemma it recognises is how to strike a balance between early intervention to protect consumers and how to allow firms the freedom to develop innovative products and services.
There is also its relationship with the FOS - ultimately, if products don't do what consumers reasonably expect them to do, then the FOS can compensate customers. But the FSA now believes that this post-event response is not enough. It plans to get involved earlier to nip ‘toxic' products in the bud.
In essence, this is the FSA's manifesto for the CPMA and as such, is required reading for the insurance industry. At its most extreme, the manifesto could lead to a highly interventionist approach and involve the CPMA acting as a gatekeeper for all products entering the market.
The FSA says it does not propose to do this "at present", recognising that this would stifle innovation, be costly and create the potential for mis-perception of ‘FSA endorsement' of products.
But once it moves from strategy to rules, the chances are there will be regulation creep and more rules-based enforcement. Indeed, the paper states that firms will
see increased supervisory and enforcement focus on their product governance processes.
The FSA goes on to list some of the product areas that concern it most. For insurance, it points out that consumers don't know there is a problem with a product until years after they have bought it and claim - and they are then hit with its less attractive features, such as limits to cover and exclusions.
The FSA goes on to give three criteria on how it will determine the significance of a potential product problem, all of which apply to protection insurance: whether an individual's core financial interests are affected, including protection of income; whether the detriment is important for consumers facing financial hardship; and whether the impact is likely to be long-lasting or non-rectifiable.
The regulator then gives a long list of problematic product features with some specifics. For protection insurance, the key one is probably excluding large groups of customers at claims stage. This is a powerful incentive for IP products not to have standard exclusions for back pain and mental illness.
Then, as if to reassert my point about regulation creep, they move to ‘principles-based regulation' and argue that there should be greater prescription with new rules and requirements covering each stage of the product life cycle - and there follows another long list.
Finally, right towards the end, the FSA says it may specify that insurance products must include (or not include) particular product features, and link this to the HMT consultation on simple products. It suggests that whatever comes out of that exercise could be used by it as a benchmark for the rest of the market.
Beware a repeat of stakeholder pensions.
Richard Walsh is a director and fellow of SAMI Consulting www.samiconsulting.co.uk
