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FCA's temporary product ban powers "approval by another name", says expert

The Financial Services Authority (FSA) is consulting on a new power that will enable regulators to ban financial products without consultation in certain circumstances.05 Dec 2012

Temporary product intervention powers will enable the new Financial Conduct Authority (FCA), which will take over the FSA's conduct and compliance functions from April next year, to make non-renewable rule changes for up to 12 months in cases where it needs to intervene quickly.

The FSA said that it was most likely that the new regulator would use its new powers to restrict the marketing of products at risk from mis-selling to certain groups of customers, or remove or change unsuitable product features. The FCA would only ban products outright in "the most serious of circumstances", it said.

However financial services expert Bruno Geiringer of Pinsent Masons, the law firm behind Out-Law.com, said that the uncertainty that would be created by the proposals could "cause chaos" for product providers.

"This looks more like product approval by another name," he said. "It could cause chaos for product providers as they release new products into the market not knowing if they will be subject to new intervention rules with little or no warning and with catastrophic consequences to their businesses."

Warning firms that they should "review and upgrade their product governance" ahead of the changes, Geiringer said that the onus to keep abreast of the release of new rules would become "another burden" on firms.

According to the consultation, the FCA will publish any temporary product intervention rules both on its website and within its Handbook. However, it does not intend to contact all affected firms directly due to the "likely urgency" of any rules introduced this way. "It is likely that the use of these rules will generate significant media interest, and as a result it is unlikely that provider firms will remain unaware of FCA actions," the FSA said in the consultation paper.

The consultation sets out a range of circumstances in which the FCA may wish to introduce temporary rules. These could include where complex or niche products are in danger of being sold to the wrong customers, where non-essential product features appear to be causing serious problems for consumers or where the product itself is flawed.

Rules made before consultation under the power would last for no longer than 12 months, during which time the regulator will either consult on a permanent remedy or find some other way to resolve the problem.

The FCA will also be able to intervene in the market in other ways, including by issuing warnings or using its supervisory powers to force firms to make changes to their promotional materials. These changes would not necessarily result in changes to the rules, the FSA said.

FSA managing director Martin Wheatley, who will head the FCA, said that the power would enable the new regulator to act "quickly and decisively" to protect market participants.

"Making temporary product intervention rules is not something that we expect to do often but having this power means we can act quickly and decisively," he said. "The use of the power will be a judgement based on the need to protect all market users, consumers and industry innovators alike, from the type of products which will cause harm and might generate compensation costs."

The FCA is one of three bodies which will be established under the Financial Services Bill, a draft of which is currently before Parliament. The Bill will dismantle the FSA and hand most of its day-to-day regulation and supervisory powers in relation to banks, building societies and insurers to a new Prudential Regulation Authority (PRA) within the Bank of England. A new Financial Policy Committee (FPC), also within the Bank, will address wider 'macro-prudential' issues that may threaten economic and financial stability.

The 'legal cutover' date on which the new regulatory regime is anticipated to come into force is 1 April 2013. The FSA intends to prepare a final statement of policy on the use of the new power before this date, so that the text can be published on the FCA's website following legal cutover. The proposals are open for comment until 4 February 2013.

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