Regulator has vowed to take a 'more intrusive' approach to regulation
The Financial Services Authority (FSA) has issued guidance to providers of payment protection products, in a bid to avoid a repeat of the mis-selling scandal that enveloped payment protection insurance (PPI).
The draft guidance sets out how the regulator expects providers to prevent consumer detriment, spelling out how product design, distribution and promotion must all be undertaken in such a way as to protect the end user.
It follows the FSA’s announcement in January that it would undertake “more intensive and intrusive” scrutiny of product development, in the light of high profile large-scale episodes of consumer detriment, including pension mis-selling and problems with split capital investment trusts and structured products. The FSA identified new forms of payment protection products as an emerging risk in the Retail Conduct Risk Outlook, published in February 2011
The guidance on payment protection products is aimed at providers, including insurers designing short-term income protection (STIP). Research company Defaqto reported recently that the number of short-term income protection (STIP) products available to consumers has almost doubled in the last 24 months
The FSA highlights risks including a failure to identify the target market for products. For example, a STIP product is unlikely to be suitable for consumers without an income to protect or who have an alternative safety net in place.
Other risks include products that do not reflect consumers’ needs, the benefit of a successful claim not matching consumer need and features which create barriers to comparing products or switching cover.
Margaret Cole, FSA managing director, said: "This is the first time that the FSA has issued guidance on the design of a specific product. Firms must learn the lessons of the past and make sure they have consumers' needs at the heart of new product development.
"That is why we are acting early to ensure firms understand the risks they should bear in mind when designing these products, and how they can manage these risks when developing or distributing the product.”
Back in January, Maggie Craig, acting director general at the Association of British Insurers, said there were dangers to avoid in the FSA undertaking a more intrusive approach to its role.
"Heavy regulation of both the sales process and product design could make it uneconomic for firms to offer products to consumers," she warned. "The focus should be on where problems exist and take into account that many markets already work well."
The consultation on the new guidance will close in January next year with final guidance published by the summer. Information for consumers will also be published.