Page last updated at 17:31 GMT, Friday, 12 March 2010

FSA to clamp down on financial services mis-selling

Hector Sants
Hector Sants wants to restore trust in the financial services industry

The head of the Financial Services Authority says the regulator will toughen up protection for consumers against poor financial products.

Hector Sants says the FSA needs to stop risky products being sold, rather than just paying out compensation when the damage had already been done.

Investors have been hit by some severe mis-selling scandals in recent years.

Mr Sants said the FSA would now take a "dramatically different approach" to protecting customers.

"We will now seek to proactively intervene earlier in the product chain to anticipate consumer detriment and choke it off before it occurs," he said.

By Ian Pollock, personal finance reporter
It is amazing it has taken so long for the FSA to decide it should actually prevent dodgy financial practices getting off the ground.

What, you may ask, has the FSA and its predecessors actually been doing?

The past 20 years have seen millions of people mis-sold mortgage endowments, personal pensions and payment protection insurance.

Consumers complained, and the media reported, as these scandals emerged; the FSA only acted once the damage was done.

Now, with its future threatened by a possible Conservative government, it has decided to raise its game.

What a pity it has taken so long to accept what most people think regulation should be all about.

Mr Sants admitted that until now the FSA's approach had meant waiting until there was "clear evidence" that something was wrong.

He admitted this had not been good enough.

"[There] was the inability to spot and prevent major risks from crystallising, resulting in damage to consumer and market confidence and ultimately consumer harm," he said.

"Even though in these situations we have delivered redress, firms have continued to make substantial profits from exploiting market failures. Fines and past business reviews are proven not to be a sufficient deterrent.

"Essentially, our focus has been too late in the product lifecycle to ensure that we identify potential issues early enough to prevent consumer detriment," he added.

On the ball

The Conservatives want to scrap the FSA and hand some of its powers to the Bank of England if it wins the election.


Last month, Mr Sants announced that he would step down as head of the FSA this summer.

Before he goes, he is keen to push the proposals through to give consumers better protection when buying mortgages, pensions and investment products.

In doing so, he hopes to restore public trust in the financial services industry after mis-selling scandals including personal pensions, endowment policies, split capital investment trusts and payment protection insurance, some of which predate the FSA.

Earlier on Friday, Mr Sants told the BBC what the new approach to regulation would mean.

"We'll... need to step up our ability to see mis-selling before it has come too widespread, and that will require us to make more on site inspections both as FSA inspectors but also through mystery shopping where we pose as consumers," he said.

"So I think we need to sample what is going on in the marketplace, get out there, get out in the field, be visible and not just wait until the consumers complain," he added.

He added, however, that the FSA would not be "pre-approving" every product on the market, as there were simply too many of them.

Change 'disruptive'

On the Conservative plans to break up the FSA, Mr Sants told the BBC that staff would be "unsettled" by such a change.

"Any structural change clearly comes with a cost, it is disruptive, fragmentation of agencies usually raises costs and that would be a significant operational price to pay for any change," he warned.

However, he stressed that the policies, rather than the structure of regulation, were more important.

And he argued that the FSA had become far more effective over the past two years, and that the same people would continue to make the important decisions, no matter how the FSA was altered.

Shadow Treasury Minister Mark Hoban said Mr Sants was taking a step in the right direction:

"We recognised for a long time that people buying pensions, insurance, savings products, haven't received the protection they need and deserve, and we have argued for a single consumer protection agency to look after consumers, to bring together some of the work the FSA does and the consumer credit work the OFT [Office of Fair Trading] does," Mr Hoban said.

"But also we need a change in approach. We need the regulator to be much more proactive, to take action when they see a problem emerging rather than waiting until one has happened, as we have seen what has happened recently with payment protection insurance."

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