The question the Financial Services Authority recently posed to the industry was whether it should have additional powers to intervene in product development, and whether it should be able to ban a product outright.
The FSA has been seeking views on product intervention via a discussion paper it published earlier this year. It asked about the criteria which should be used to assess whether to intervene in financial products and whether there are any reliable indicators of where such intervention might be justified.
It is fair to say that if the FSA were to scrutinise new products at an earlier stage in their development life cycle it might anticipate problems before they occur and reduce their likelihood. And prevention would certainly be better for all than retrospective regulatory action.
But the FSA largely has these powers already – which can be used to similar effect as an outright product ban. Product banning is a blunt tool and should only be used as a last resort following reasoned and balanced investigation: as a regulator, the FSA also needs to ensure it does not inhibit competition, which can lead to innovators creating new and better services for their customers.
So the question is whether the FSA can promote innovation while becoming more active in the early stages of a product’s development. A detailed impact assessment and cost benefit analysis of such changes would be the sensible next step.
And if it chooses to take this route, the FSA’s changes should be evolutionary rather than revolutionary, to better reflect the many initiatives already under way which may resolve the FSA’s main concerns. The Retail Distribution Review, the Markets in Financial Instruments Directive review, the Treasury’s Simple Financial Products project and other such initiatives will change the landscape – not to mention the creation of the new Financial Conduct Authority which will be the successor to the FSA.
Voluntary industry standards can help the FSA to meet its objectives here too, as we recently saw with the new commitments for credit and store card customers enshrined in the new Lending Code.
And – crucially – the recent launch of the Money Advice Service and a renewed focus from the government on financial education will also play their part in empowering consumers to make the right decisions for their futures.