Regulatory report ignores need for financial businesses to take risks, says expert

In its Retail Conduct Risk Outlook (RCRO) (124-page / 6MB PDF), the Financial Services Authority (FSA) said that consumers were still at risk of being mis-sold unsuitable and overly complex financial products as they struggle to cope with the effects of a slower economy, low interest rates and poor investment returns. It warned firms that it would be scrutinising sales of more complex investments, including structured products and traded life insurance policies, in detail.

The FCA, which will take on the conduct and compliance role of the FSA when the current regime is dismantled, is due to be established in 2013. The FSA said that the new regulator will "focus even more on ensuring there is a fair deal between firms and their customers".

Insurance law expert Bruno Geiringer with Pinsent Masons, the law firm behind Out-Law.com, said that, in reality, consumers were "too scared to take action and protect their financial well-being". He said that he was surprised that the regulator had not addressed this, and added that it was "remarkable" that the FSA had de-prioritised the impact of tax changes on financial products.

"We are starting to see the emergence of the new business conduct regulator, the FCA, and this risk assessment shows the current thinking of the regulator as the FSA transitions into the new regulatory regime. It is clear that unfortunately the FSA has placed little emphasis on the need for businesses to take risks in order to succeed," he said.

The RCRO also highlighted the need to align the business models of financial services companies to the fair treatment of consumers - particularly where these have had to change as a result of cost-cutting and other economic pressures - and to provide better complaints-handling procedures.

"Aggressive" bonuses for sales staff had contributed to potential mis-selling, the report said. It added that an increasing focus on cross-selling multiple products to individual customers was an "emerging risk" it was beginning to monitor more closely.

"We recognise the importance of the reward and remuneration of individuals within firms and that firms may need to incentivise staff... However, reward schemes can also be drivers of behaviour that can lead to consumer detriment. We expect firms to treat their customers fairly, which includes managing the risks associated with reward," the report said. It added that the regulator was now considering action against firms that had not "adequately controlled" the risks associated with mis-selling where appropriate.

"While cross-selling may benefit consumers in some circumstances, it may also lead to a risk that products will not be appropriately targeted or will be mis-sold, which could lead to consumer detriment. We remain concerned that the drive to increase selling can expose consumers to additional risk of detriment. We will continue to monitor these issues through our firm supervision work," the report said.

Regulatory change remains an important factor impacting on firm's business models, the report added. It cited changes to the banking conduct regime, the auto-enrolment of eligible employees into workplace pension schemes, the banning of commission for investment advice under the Retail Distribution Review (RDR), the impact of new European solvency standards for insurers and the removal of gender-based pricing from insurance products and pensions following a European Court of Justice (ECJ) decision as particular areas of concern.

FSA managing director Martin Wheatley, who is to run the FCA, said that it was clear that both financial service firms and the regulator had work to do to restore confidence among consumers that they were being sold the right products.

"Consumers rely on financial firms and their products to provide them with vital services - literally the means to run their lives. They need to be able to trust that the products they buy work for them and that they are getting a fair deal," he said.

"Our analysis means we can focus our work on the most significant risks facing consumers. It also helps firms to understand how to avoid the bear traps of designing products for maximum profit but little benefit to customers."

urther measures due to be introduced to combat spiralling executive pay would include more transparent remuneration reports and increasing the diversity of company boards and remuneration committees. Companies will be forced to publish a single figure for executives' pay deals and will have to explain how those figures were reached by reference to performance. Boards will also have to outline how executive pay compares to other payouts such as dividends, although they will not have to indicate how executive salaries compare to those of ordinary employees.