FSA seeks power to ban sale of risky financial policies

Lord Adair Turner
Image caption More intervention is required, says Lord Turner

The Financial Services Authority (FSA) is moving closer to banning the sale of risky financial policies to the public.

The idea is contained in a consultation paper on its future powers to protect consumers.

The powers would come into force alongside the introduction of the Consumer Protection and Markets Authority (CPMA) in 2012.

The FSA's chairman, Lord Turner, said the regulator wanted to stage a "significant shift" in its approach.

"[We propose] a quite new and more intrusive approach to the regulation of retail financial services, aiming to ensure that potential consumer detriment problems are identified and offset at an early stage," he said.

New restrictions

The FSA said it did not intend to act as gatekeeper, authorising in advance all financial policies that might be offered to the public, but on rare occasions some policies might be banned.

It said it would take action where it saw "risks of significant detriment for consumers" and was already starting to do this.

"We recently refused to grant permission to a firm because we considered that their core product was fundamentally unsuitable for consumers, demonstrating a combination of 'toxic' product features that have led to poor customer outcomes in the past," the FSA said.

In the future, the regulator may also cap fees or charges which it feels are excessive, as well as issuing warnings to the public and the financial services industry.

And it might expand its list of policies which it thinks are unsuitable for the general public, to include traded life policy investments, some complicated structured products and leveraged exchange traded funds.


The FSA first raised the possibility in March 2010 of taking a more aggressive approach to protecting the public from being sold high-risk investments.

Its chief executive, Hector Sants, admitted it should have stopped some policies being sold in the first place, rather than waiting until a scandal developed before trying to clear up the problem.

The regulator says its aim now is to "reduce consumer detriment by dealing with problems earlier, scrutinising the whole of the product lifecycle from start to finish rather than just focusing on the point-of-sale".

"[This] might include interventions such as banning products or prohibiting the sale of certain products to specific groups of customers."

The FSA said it aimed to stop financial services companies designing and selling "exploitative" investment policies that took advantage of customers.

'Toxic to consumers'

Plans to dismantle the FSA were announced by the Chancellor George Osborne in June.

Banking supervision will return to the Bank of England while consumer protection will be left with a new CPMA.

The FSA's latest move was welcomed by the consumers' association Which?

"We're pleased to see Lord Turner recognise that the FSA's 'hands off' approach to product regulation needs a serious overhaul," said its chief executive, Peter Vicary-Smith.

"Which? has been campaigning for years for the FSA to tackle the problems at the heart of the industry - that many [products] are fundamentally useless or, even worse, toxic to consumers.

"If left to its own devices, the industry will spend its energy inventing products and sales practices that fill the balance sheets but don't deliver for their customers," he added.

The FSA's consultation ends on 21 April 2011.


The financial services industry has been scarred by several high-profile scandals during the past two decades involving the mis-selling of policies such mortgage endowments, personal pensions and payment protection insurance.

The FSA gave three examples of other types of investment whose sale it might have stopped or altered, if it had had the power to do so: broker funds, structured capital at risk products (SCARPs); and self-certification mortgages.

Broker funds, which were sold in the 1980s and 1990s, involved a client's adviser also having a hand in managing the investments.

"Broker funds carried inherent conflicts of interest, could be much more expensive than alternative funds and often offered worse performance than those alternatives," the FSA said.

SCARPS led many investors to lose money when the policies matured.

"In the late 1990s there were problems in this market when these products were sold in volume to customers unwilling to take risk with their capital," the FSA said.

"Around 450,000 SCARPs were sold between April 1997 and February 2004 and our work to investigate the issues led to around £159m in redress for customers," the regulator added.

Self-certified mortgages, where lenders do not check the income of the borrower, have been the focus of the FSA's recent concern about the mortgage market.

"Our analysis shows that arrears rates are significantly higher for self-certified mortgages than for income-verified mortgages, so the potential for customer detriment is significant, in addition to the fraud risks posed by this type of mortgage," the FSA said.

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