The Right Approach - Financial Adviser - Philip Ryley

Published by FT's Financial Adviser 17 November 2011

This month the FSA and the Office of Fair Trading have jointly published a consultation paper on proposed guidance to firms in relation to payment protection insurance with the purpose of helping to prevent the problems associated with PPI recurring in a new generation of products. The next generation includes products such as short-term income protection, or debt freeze or debt waiver as elements of a credit agreement or mortgage.

The key areas of concern that the FSA has proposed providers should think about are:

• Firms not properly identifying the target market for the protection product.
• The protection not reflecting the needs of the intended consumers.
• The benefit of a successful claim not matching the needs of a claimant.
• Product features or pricing structures creating barriers to comparing products, exiting a policy or switching cover.

Margaret Cole, managing director of the FSA, 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. We want to put consumers 'front of mind' for the providers and distributors of these products".

This approach builds on existing high-level FSA guidance, in particular the regulatory guide The Responsibilities of Providers and Distributors for the Fair Treatment of Customers. If product providers and advisers alike had interpreted and implemented this correctly, that is in a way that the FSA had intended, how different things might have been.

However, that is water under the bridge now and the FSA has indicated that far greater regulatory intrusion in the development, marketing and distribution of similar products will be evident. The FSA has said good product design is central to delivering good outcomes for consumers and that firms should be able to demonstrate that they are consistently delivering fair outcomes to consumers. This approach could be similarly applied to investment and mortgage products as well as insurance products, and so let us see how it all develops.

Philip Ryley is a solicitor and Head of Financial Services & Markets at Michelmores LLP, based in Exeter and London.