UK's Financial Services Authority Takes Forward Sandler 'Lighter-Touch' Regulation Proposals

The Financial Services Authority has outlined three broad options for introducing lighter-touch regulation for face-to-face and telephone selling of a simplified suite of investment products. These products, as recommended in the Sandler report of July 2002, would have specifications set by the Treasury to ensure simplicity and control investment risks. They would be aimed at making long-term savings more accessible to lower-income customers.

The options are set out in FSA Discussion Paper 19, Options for regulating the sale of 'simplified investment products', published today. They are:

1. Self-help. Consumers would receive clear warnings about the basis of the sales process and relevant risks, which could be understood without further reference. Caveat emptor would apply and customers would be required to confirm that they understood the information given.
2. Guided self-help. A series of filter questions, set by the FSA, would be used by the salesperson to screen out consumers who should not be thinking about buying the product concerned. Firms that had applied the simplified sales regime could not be held liable for poor advice, although consumers would still have protection against misrepresentation or fraud.
3. Focussed advice. An adviser would make a limited assessment of individual suitability, to a scope set in FSA guidance. An adviser could give advice on the simplified suite of products only without having to train to the level required for the full range of regulated advice.

Michael Folger, FSA Director of Conduct of Business Standards, said: 'Appropriate consumer protection will need to be based on the right balance between the rules covering the sales of the products and the specifications that the Treasury will set for their design. Simplified, risk controlled products could help to attract new savings but they will not be a suitable choice for everyone. Getting credit card debt under control, for example, may be the more sensible first step for some consumers.

Of the three options that we have set out, regulation of the sales process, based on filter questions to screen out consumers at clear risk of buying unsuitable products, looks quite promising. But we need to listen carefully to our stakeholders before deciding what kind of approach to develop into detailed proposals. The outcome of the Treasury-led work on the product specifications will also be important.'

The Discussion Paper covers ground explored in the FSA's Consultation Paper 121 in January 2002 and developed further by Ron Sandler in his review of medium and long-term retail savings in the UK, published in July 2002.

In parallel with the FSA discussion paper , HM Treasury plans to consult in early 2003 on the minimum specifications for the recommended suite of simplified products. Respondents may wish to consider the twin consultations alongside each other. At this stage comments are sought on the FSA's broad options in relation to the sales process by 15th April 2003. Responses to the FSA, and HM Treasury's developing thinking, as reflected in its consultation, will help the FSA develop detailed proposals for consultation.

The FSA's proposals for the regulation of with-profit policies will be addressed in a separate Discussion Paper, to include with-profits simplified products, planned for January 2003.

Background

1. Much of the detail to be included in the sales regime will depend upon the products to be included within the suite and the standards to be applied to them. The Sandler review suggested that the main weight of FSA regulatory requirements over face-to-face selling derived from the typical complexity of the products. It advocated product regulation as a means of protecting the consumer at source, accompanied by a more flexible approach to regulation of the sales process. In particular, the review recommended the development of a suite of simple and transparent regulated products, in respect of which the present approach to regulating the advice process could be removed altogether. This would build on the specially tailored Stakeholder pension sales regime.
2. The FSA is responsible for designing an appropriate and proportionate regulatory regime that supports both the consumer protections built into the products and also the risks to which consumers will still be exposed when buying these products. This regime will, of course, need to be consistent with its statutory objectives and the principles of good regulation. This includes our requirement under the FSMA to secure appropriate consumer protection, with regard to four principles set out in the Act:
   • the differing degrees of risk involved in different kinds of investment;
   • the differing degrees of experience and expertise that different consumers may have
   • the needs consumers may have for advice and accurate information; and
   • the general principle that consumers should take responsibility for their decisions.
   The customer classification system adopted in the conduct of business sourcebook affords the greatest protection to those consumers classified as 'private customers', which is a proper reflection of the second of these principles.
3. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the appropriate degree of protection of consumers; and fighting financial crime.
4. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.