MSE News: FSA could ban risky products

Former_MSE_Guy

This is the discussion thread for the following MSE News Story:

"Some products may be outlawed and price caps imposed as part of a radical rethink of consumer protection ..."

Read the full story: FSA could ban risky products

Reaper

Rather than preventing people taking out policies (too nanny state in my opinion) how about a letter rating system similar to washing machines, fridges etc so investors would be warned to look closer at those seemingly safe policies with attarctive returns?

I think I would have 2 categories. e.g.

The FSA Rating for this product is:
Charges: C
Risk Rating: B

Or None, Low, Medium, High, Extreme etc if you prefer.

Lokolo

I agree with that Reaper. The Big D does say he has a system for this sort of thing, so they rate investments based on 1-10. Don't see why this couldn't happen all over the place.

MSE_Martin

While in investment the issue is risk (nightmare to explain to people as there are 'high, medium and low risk invstments' but what is a mid risk investment is still risky if contrasted to deposit accounts.

Yet actually i suspect underneath this much is about complexity - so if we were to follow your note above I'd want a 'complexity' rating too. which indicates whether there are things to watch for

~Brock~

Why not demand the customer to take an IQ test, the results of which will indicate the complexity of the product(s) allowed to be offered.......

............now, although I typed the above with tongue firmly in cheek, is that not the essence of what the FSA thinks is the root of the problem?

Are they actually saying indirectly that some people only deserve basic low risk savings accounts because they are too thick to understand anything else?

dunstonh

The FSA has come out with three statements today according to the financial press. They seem to contradict each other as in the second statement they have said they dont want to ban risky products but perhaps stop them being retailed without advice.

The Big D does say he has a system for this sort of thing, so they rate investments based on 1-10. Don't see why this couldn't happen all over the place.

The scale I use is 1-10 with cash being 1 and 10 being the highest risk unit trust fund currently available (so keeping with retail funds). I also have a risk level above that called specialist. Rarely gets used but that is where you find your VCTs and EIS etc. Products not designed to be used by your typical retail client whereas 1-10 are.

The rating scale is firm specific. There is no global one-size-fits-all risk scale. You have to evidence your risk profiling to the FSA who give no support whatsoever on risk levels. The only times you tend to know if you were right or wrong on your analysis is when a firm gets fined or you read complaints from the FOS.

A risk scale of just 3 (low, medium, high) would be considered woefully inadequate nowadays. Although it was very common in the 80s and early 90s. Also, the methods used back then were minimal compared to the methods now. However, even today, there is often a lack of consensus on risk assessment. Even the FSA cant decide at times. Sometimes they focus on short term volatility, sometimes long term. e.g. an equity based investment has its risk reduced over time. yet in any short time scale, it could lose a lot of money. So, do you look at risk as short term volatility or long term volatility?

Why not demand the customer to take an IQ test, the results of which will indicate the complexity of the product(s) allowed to be offered.......

That effectively happened when MIFID was introduced. Advisers now have to take the person's IQ into account and make sure the person is able to sufficiently understand what they are doing. This often means having to recommend investments that you wouldn't use yourself and put people into products that are not the best option but the option that is appropriate for their IQ. It used to thought that the whole point of seeing an IFA was to get best advice on areas you didnt know about. However, nowadays, its more a case of getting the best advice that is dumbed down to your level of understanding.

Are they actually saying indirectly that some people only deserve basic low risk savings accounts because they are too thick to understand anything else?

In extreme cases, yes. However, in reality its more a case of someone being recommended a bog standard balanced managed fund with self balancing rather than a spread of investments in the various sectors that average out to meet the same risk profile.

At a meeting last year on complaint trends, we were shown a recent complaint on investments that only used unit trust/OEIC funds in a sector allocated portfolio. It was on fee basis (with commission rebated) and it had a very good report, the spread of funds was good and as it was on fee basis, it was low cost. We were asked if we felt it was an upheld complaint or rejected. Everyone in the room said rejected. However, it was upheld and redress paid. The reason being that because the person was a courier, he could not reasonably be able to understand short term volatility. That basis was made purely on his occupation.

wantanswers

Hi Reaper, Dunny.

Its not the risky products, but risk dealers that need banning. Lol.

Nigh night.

Paulgonnabedebtfree

I have wondered how practical it would be for insurers, when selling products related to health or life cover, to check people's medical records at the beginning. It can be easy to forget about something on the proposal form that would later invalidate cover. Very high risk for the policy holder (or the ones who survive them). As far as health insurance goes, it would be helpful to have a less legalese description of what is covered and what isn't.
It's not as if I'm as thick as two short planks either. Average intelligence I guess but would struggle with some of the above.

dunstonh

I have wondered how practical it would be for insurers, when selling products related to health or life cover, to check people's medical records at the beginning.

It would increase premiums significantly, slow down the application process and only benefit a small minority of people (at typically the non disclosure rejections are only around 5-10%. The FOS has fairly good non-disclosure rules in place nowadays as well.

Arthurian

So getting an investor to sign a disclaimer saying they understand the advice and products isn't enough?

What about someone who decides to apportion most of their wealth to sensible, appropriate investments, but wants to blow 3% on a gamble which they know might completely collapse?

dunstonh

So getting an investor to sign a disclaimer saying they understand the advice and products isn't enough?

Nope.

Consumer protection is good but you can take it too far. Barclays have just announced they are closing their full advice arm and making everyone redundant. You will no longer be able to receive advice from Barclays. They have said it will no longer be viable to provide advice and remain profitable. The liability is too high. Expect others to follow suit.