Financial watchdog says inflation could lead to misselling

21st October 2011

He also blames this complexity and the fact that sales people know more than consumers for waves of misselling in the last 20 years.

Here trade site Money Marketing concentrates on the warning quoting Turner saying: "The potential to sell products which carry more cost or risk than customers appreciate is ever-present; and particularly today when low interest rates mean low returns for truly safe investments, making consumers highly vulnerable to the promise of complex structured products  which appear to offer the dream combination of higher return without higher risk."

In a speech at the Mansion House in the City of London, Turner admitted that he believes it is impossible to stop all misselling, but that a new system of regulation will make it less likely.

He also has concerns that the EU may set Europe wide capital requirements but that the UK might want higher levels.

The full transcript of the speech is here on the FSA website.

But this is the key passage where he is effectively telling investors they will be better protected and he sets in the context of the banks misselling payment protection insurance.

"While we were reviewing with major banks, in the early stages of our Treating Customers Fairly initiative, their processes to ensure fair treatment of customers, the same banks were selling payment protection insurance (PPI) not only to those customers for whom it might be a good product but to many for whom it was very obviously not.

"Faced with that reality, the FSA signalled last year that we intend to switch to a more active preventative approach, ensuring that mis-selling on the scale of PPI is nipped in the bud earlier, rather than subject to post-facto compensation. The government's consultation paper in February this year stated that the FCA should have a ‘greater willingness to intervene in the early stages of the product lifecycle…to deliver better outcomes for retail customers'. And the FCA's approach document published in June this year stated that the FCA would be ‘more ready to intervene, making full use of its powers, to tackle potential and emerging risk to consumer protection… before they materialise… in order to prevent large scale detriment".

Turner has big worries about bank capital as well.

He wants the new Bank of England committee – the Financial Policy Committee – to have the ability to vary bank capital on a countercyclical basis. That means that when the economy is doing well, the regulator could require banks to hold more capital to protect them against risky lending or trading that a booming economy might tempt them into. But there is more concern about the role of capital when the economy is doing badly. Then the FPC might face a dilemma.

As Risk.net points out – "This power would leave the FPC with a dilemma in future downturns, if they were – like the present downturn – associated with worries about the strength of the financial sector. The FPC would either have to allow banks to reduce their capital buffers to produce a countercyclical effect on the wider economy, or compel them to keep capital levels high to preserve market confidence in their soundness – essentially being forced to risk either a banking liquidity crisis or a deeper recession."

Other websites seize on concerns about EU capital requirements. GFS News reports that Adair Turner backed policymakers in favour of flexibility, rather than EU specified requirements.

Turner suggested that maximum harmonisation of rules where the EU regulations must be implemented in full and not added to "is simply wrong and potentially harmful".

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