Victory for consumer rights

23 September 2009

Controversial plans to force consumers to take more personal responsibility when picking financial products have been ditched by the financial watchdog.

The Financial Services Authority (FSA) last year launched an investigation into ways it could ensure people understand and protect their own interests when taking out financial products.

However, critics warned that this would damage consumer rights and provide a smokescreen for banks and other financial firms to act unfairly. For example, there were concerns that some providers might introduce a ‘caveat emptor’ - or ‘buyer beware’ - alongside financial products or services.

There were also concerns that forcing consumers to take more responsibility could get in the way of complaints, refunds and compensation agreements.

In what appears to be a victory for consumers, the FSA has now backtracked on the plans, citing a lack of consensus. Currently, providers and advisers, such as mortgage brokers and IFAs, are obliged to ensure they treat their customers fairly while consumers are expected to read important documents and fill in application forms honestly.

The FSA says that, in the absence of a wider consensus, it will maintain its current approach.

The decision has been welcomed by consumer groups.

Adam Phillips, chairman of the Financial Services Consumer Panel, an independent body that represents consumers to the FSA, says: “The FSA’s original idea that consumers should have regulatory responsibilities was at best naïve, and at worst irresponsible. The Panel has always argued that the concept of ‘consumer responsibility’ is flawed.”

However, the regulator is unlikely to drop the issue altogether. “The more engaged, demanding and discerning consumers become, the better off industry and consumers will be,” says Dan Waters, director of retail policy and conduct risk at the FSA.

Common law contains the principles of ‘caveat emptor’, but the FSA says consumer responsibilities under this are not enforceable. Instead, it acts as a limit on the extent to which a consumer will be able to recover any loss suffered as a result of a transaction.

Regulating products

Meanwhile, a recent speech by Jon Pain, managing director of retail markets at the FSA, proposed regulating specific products as a way to protect consumers and restore trust in banks.

“There is a clear and important link between financial capability and individuals’ trust and confidence in the financial services industry,” Pain said to delegates at a savings and pensions summit at Gleneagles on 19 September. “But it’s a long journey so meanwhile we need to think about how best to protect consumers – one such area is through product regulation.”

This could see the FSA pre-approve or even ban certain products that it feels raise concerns about consumer protection. To some extent it already does this – for example, it recently banned banks and other providers from selling single premium payment protection at the point a loan or other form of credit is taken out.

Pain says the FSA maintains an “open mind” about whether to fully adopt product regulation.

“The reasons for introducing product regulation are based on the limits of the other tools we currently use,” he said during his speech. “Experience has shown that [ensuring consumers are given the right information in order to enable them to make the right choices] is not a panacea to enable consumers to deal with product complexity and make informed choices.”

He added that consumers must be able to understand the nature of the products they are actually buying and how it meets their needs.

“Product regulation could potentially not only improve consumer outcomes but also change competition dynamics within the marketplace. Arguably, product regulation could lead to more standardised products which could incentivise firms to offer better value rather than compete on extraneous bells and whistles. This could also bring economies of scale.”

However, Stephen Haddrill, director general of the Association of British Insurers, warns that regulating products would limit innovation and, ultimately, be bad for consumers.

“Consumers do not come in one size, so markets should be allowed to deliver a wide range of products, suitable for as many people as possible,” he explains. 

In addition, the cost of extra regulation might be passed onto consumers, making basic financial products more expensive or less competitively priced.

But Pain argues that ‘innovative’ products may contain “exploitative features or unnecessary complexities”.

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