The UK's Financial Services Authority (FSA) is consulting on when and how its successor body, the Financial Conduct Authority (FCA), may make temporary product intervention rules, as part of its new approach to regulating retail financial services and preventing consumer detriment. Whatever the outcome of the regulation, any changes on the overseas requirements will have a potential impact on the Australian market given the cross-border nature of funds and investment products.
The FCA will be created by the Financial Services Act 2012 (the Act), which reforms the UK's current financial regulatory system, and which is expected to come into force on 1 April 2013.
The Act specifically provides the new regulator with the power to make temporary rules before any consultation, where it considers it is "necessary or expedient … for the purposes of advancing the consumer protection objective or the competition objective, or … the [market] integrity objective".
Intervention rules may address a wide range of product-related issues, for instance by restricting the marketing of a product to only certain types of customer, or by requiring a product feature to be removed or changed in some way.
Where there is high risk to consumers, the FCA might make a rule to ban a product altogether, but it would only do so in very serious circumstances (but did not provide more guidance on what this would constitute). Other possible interventions might include issuing warnings, using supervisory powers to require firms to amend promotional materials, or preventing non-advised sales of a product.
The types of products, which might trigger the making of a temporary intervention rule include products where there is a significant incentive for inappropriate or indiscriminate targeting of consumers, or products that would be acceptable but for the inclusion/exclusion of a particular feature. Other circumstances may include, where:
● a product is in serious danger of being sold to the wrong customers, for instance where complex or niche products are sold to the mass market;
● a product is inherently flawed. For example, a product that has such disadvantageous features that the majority of consumers are unlikely to benefit. Otherwise, the report did not indicate how FCA would decide that a product is 'inherently flawed';
● a product is so complex that most consumers would be unable to understand the risks or feature of the product;
● a product is designed to exploit consumers' focus on the headline price or other near-term features, as opposed to outcomes in the long-term;
● products are bundled in a way that creates the potential for consumer detriment, by unduly restricting the consumer's access to individual components, where the other elements of the bundled or tied products may not be useful to them;
● certain product features, which are not integral to the effective operation of the product, might unduly restrict search or switching.
In deciding whether the rule should be made as a temporary product intervention rule, the FCA's main consideration will be whether prompt action is deemed necessary in seeking to reduce or prevent customer detriment arising from that product. It will also have regard to competition considerations, in that the FCA will seek to promote effective competition in the interests of consumers.
The Act requires that such rules remain in force for no more than 12 months, and may not be renewed. During this time, the FCA will consider the consumer protection problem, and either consult on a permanent remedy or aim to resolve the problem another way.
The FSA is consulting on the FCA's behalf so the new regulator's approach is clear and understood by April 2013 when it comes into effect. The FCA's Use of Temporary Product Intervention Rules consultation paper has been prepared for product provider and distributor firms regulated by the FCA, and industry associations, to give clarity on the FCA's intentions when making temporary rules. The final paper is expected before April.
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