In an interview with the Financial Times, Martin Wheatley, chief executive designate of the Financial Conduct Authority (FCA) – one of the three bodies to succeed the Financial Services Authority (FSA) next year, said: "You have to assume that you don't have rational consumers. Faced with complex decisions or too much information, they default."
Breaking with a UK regulatory tradition whereby supervisors keep an eye on sellers rather than the products, he says the FCA will change tactics – using its powers to limit or ban the sale of potentially harmful products.
This smacks of stable door, horse, bolted… Financial consumers in Britain have suffered a string of product mis-selling scandals over many years, from personal pensions to endowment mortgages and, more recently, Keydata Investment Services, with the regulators coming under criticism for their toothless handling of many of these.
Such criticisms aside, product regulation now seems inevitable. In an interview with Reuters last year, Mr Wheatley explained: "The expectation is that firms designing products are given clearer guidance on the sort of features that are acceptable and unacceptable. It's impossible to intervene in every product, but the desire is that the regulator is much quicker and earlier to step in where there are problems."
However, blanket bans on certain product types mean investors may miss out on good deals. At least Mr Wheatley admits this, telling Reuters: "Some products have inherent flaws and some products are neither good nor bad, but just suitable or not suitable for a given set of circumstances."
Products on the regulator's hit list will probably include exchange-traded funds, already under heavy regulatory scrutiny, despite a new report concluding that they are actually no more risky than other types of funds.
The clampdown will probably extend to structured products – the FSA has expressed worries about them. But at Investors Chronicle we think some of the better structured products can help investors construct balanced portfolios.
My other worry is that regulators can be 'irrational', too. The FSA's tough stance on life settlements policies has already had dire consequences for investors in the EEA Life Settlements fund. In seeking to protect investors in life settlements, the regulator forced the fund to close.
Plus the one thing that is worse than light-touch regulation allowing mis-selling scandals to occur is heavy-handed regulation stifling product innovation.
But the bottom line is that regulation is no substitute for educating investors. If people were better financially educated, had sufficient arithmetic knowledge, did their due diligence (ie read the small print on products) rather than being lazy and financially asinine, there would be little need for this change in regulatory tactics. In this respect, it is unfortunate that the resources available for financial education have been so severely cut. An easier and cheaper solution for the regulator would be to push for compulsory financial education in every school.
Also, what a huge disconnect between the Treasury giving us massive tax breaks to invest in risky new start-up companies under the proposed Seed Enterprise Investment Scheme and the new man at the FCA telling us we can't be counted on to make our own rational investment decisions. Can someone join up the thinking? I'm struggling.
