Wednesday, January 25, 2012

UK Financial Conduct Authority Product Intervention Powers Explained by Martin Wheatley

The product intervention powers of the new UK Financial Conduct Authority will be exercised around a strong governance framework in a flexible and proportionate manner assured Martin Wheatley, designated CEO of the FCA. In remarks to the British Bankers Association, he said that the power to ban a financial product will not be used either lightly or indiscriminately and pledged that regulatory intervention will not prevent innovation and product development. In addition, the FCA will set out principles for when it will use these types of powers. While the intervention powers will be a useful regulatory tool for protecting investors, he noted, it will not be the first tool the FCA reaches for and it will not be the norm. He does not envision FCA staff walking around offices ``with clipboards waiting to jump in and stop’’ the next good financial product idea.

The UK is in the process of fundamentally reforming its domestic financial regulatory regime. The Financial Services Authority is being abolished in its current form. The new Financial Conduct Authority will oversee the conduct of financial services firms, the operation of markets and the protection of consumers, with new powers to ban the sale of toxic products. Martin Wheatley is currently the Managing Director of the FSA Consumer and Markets Business Unit; and is slated to be the first CEO of the FCA. He was formerly CEO of the Hong Kong Securities and Futures Commission.

With regard to product intervention, the official set out some scenarios where intervention could be used. The FCA could intervene to ban inherently flawed products, such as products that offer such poor value or have such disadvantageous features that most consumers are unlikely to benefit from them. Also, intervention could be proper when there is widespread promotion or selling to customers for whom the product is unsuitable. Another example could be products where there is a strong incentive for a mis-sale, such as instances where profitability is so great that the product is just being sold to everyone, regardless of whether it is appropriate for them, and the usual regulatory measures will not put a stop to it.

Mr. Wheatley also detailed a number of forms of product intervention that the FCA could employ. For example, the FCA could intervene to ban the sale of a particular type of product to all customers, or to certain categories of customer. Moreover, intervention could be used to mandate the inclusion or exclusion of specific product features. Or sales could only be allowed in certain specified situations, such as only selling the product if it includes or excludes specified features, and if sales are limited to particular categories of customer, or through particular distribution channels.

On a separate point, the official urged people to follow the FSA guidance for creating structured financial products that was published last year. The guidance sets out four steps the FSA expects people designing and selling such products to go through. First, identify the target audience and design a product that meets their needs so it is clear who you are aiming it at, and that your high risk, high return investment is not meant for ``the 80 year old widow who visits your branch looking for a way to save without losing her money. ‘’

Second, test the products to ensure that they can deliver fair outcomes. This can involve looking to see how the product would fare under different scenarios. Third, have in place a robust approval process before the products go on sale. This means that the sales process gets the product in the hands of the right people. Fourth, monitor the product to see who is buying it and how it is performing. This is not just about selling it and moving on, said the official, but taking an interest in how it is actually working in practice.