FSA could ban risky products

The Financial Services Authority (FSA) plans to introduce a new "more intrusive" approach to regulation after its chairman conceded the previous regime had failed to prevent "waves of severe consumer detriment" (see the Financial Fight Back guide).

It has identified many areas of potential detriment such as hidden fees, poor investment advice and savings accounts that are linked to investments or mortgages. It is asking for consumers to contribute to a consultation on the matter.

Under the new approach, providers may have to get certain products pre-approved by the regulator.

In extreme cases, products that had the potential to cause significant losses or were repeatedly being mis-sold could be banned, or providers could be prevented from selling them to certain groups.

The FSA, or its successor the Consumer Protection and Markets Authority, would also look at introducing price caps on fees and charges, particularly where firms appeared to be making excessive profits.

Other possible changes include introducing "wealth warnings" on products which would be similar to the health warnings that appear on cigarette packets.

These would occupy a set position on promotional literature, be in a set font size and contain "bold and clear" warnings.

Certain products, which were not suitable for the majority of consumers, would only be allowed to be sold alongside advice.

Early warnings

Overall, the new regime would aim to ensure potential problems are spotted early and corrected before too many people lost out.

But FSA chairman Lord Turner warns that while a "significant shift" in regulation is required, there were important trade-offs to be made between protecting consumers but not limiting their choice, or significantly increasing costs for providers.

He says: "The crucial issue is how far along this spectrum of earlier and more intense interventions we should progress.

"Our analysis has led us to the conclusion that a significant shift in approach is required but there are important trade-offs to be struck between consumer protection and consumer choice, between effective regulation to prevent customer detriment and the costs that that will inevitably impose."

In the discussion paper, the FSA says on offset mortgages and linked products: "If a product is sold as a secondary product or bundled with another product (for example, offset mortgages that bundle savings and mortgage products), this can lead to problems.

"Given consumer interests and behavioural traits, consumers may focus less on certain product features or add-on products and request less information about them than they would about standalone products. So, bundling or offering add-on products can give providers market power, which they may exercise at consumers' expense."

The proposals have been welcomed by consumer groups.

Sarah Brooks, head of financial services at Consumer Focus, says: "With so much attention being focused on the structure of the banking industry, it is crucial to bring the spotlight back to ordinary consumers and how they are being failed by retail banking."

The Product Intervention Discussion Paper can be found on the FSA website. The consultation ends on 21 April.

Further reading/Key links

Ombudsman guide: Financial Fight Back Reclaim missold debt insurance: PPI Reclaiming Other reclaim guides: Bank Charges, Credit Card Charges, Direct Debits, Setting Off, Mortgage Arrears, Endowment Mis-selling