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March 28, 2013

Conduct risk: UK identifies product design and culture as solution to consumer protection

Is the well-being of your customers at the heart of how you run your business?

The new UK Financial Conduct Authority will look at the financial services product lifespan, from the boardroom to the point of sale and the way products are developed and not just point of sale disclosure, in an effort to improve consumer protection.

The Financial Conduct Authority which commences operations on 1 April 2013 will be responsible for regulation of conduct in retail and wholesale financial markets and the infrastructure that supports those markets. Its role is, amongst other things, to intervene earlier to tackle potential risks to consumers and market integrity before they crystallise.

Explaining the FCA's goals the FCA Chief Executive said:

"there are two sides to the risk equation – consumer detriment arising from the wrong products ending up in the wrong hands, and the detriment to society of people not being able to get access to the right products....

Our approach to risk will enable us to become more proactive and intervene earlier, focusing on the sources of detriment such as product design, governance and incentives....

Poor incentive structures that reward high-risk, short term strategies are a clear indicator of a culture where the customer is not at the centre of how the business is run. Culture change within firms is essential if we are to restore trust and integrity to the financial sector and the FCA will continue to focus on how firms are managed and structured so that every decision they make is in the best interests of their customers.."

The FCA has issued a Risk Outlook 2013 report identifying its top 5 priority risks for 2013/14:

1. Firms do not design products and services that respond to real consumer needs or are in consumers’ long-term interests.

a) There are unfair obstacles to consumers’ ability to exit or enter a product or service due to changing consumers’ needs or environmental conditions.

b) In responding to environmental or changing business conditions, firms adopt strategies that support their own interests but may not be in the long-term interests of their consumers.

c) Firms are over-exploiting their existing consumer base due to limited new business. For example firms targeting existing consumers with cash-generating products they do not need to improve margins.

d) Firms are developing complex, opaque and overpriced products that are not in the long-term interests of consumers and are difficult to compare.

e) Consumers are not fully aware of their financial needs and what products or product features would adequately serve these needs.

f) Consumers do not have access to products that meet real needs within regulated markets, due to a lack of competition and resulting shortfall in product availability and innovation.

2.Distribution channels do not promote transparency for consumers on financial products and services.

a) Consumers are prevented from being able to make well-informed financial decisions or compare product because features, costs and incentives are not transparent.

b) Information asymmetries and conflicts of interest are not managed and consumers may be using misleading information

c) Firms fail to re-assess the suitability of using existing distribution channels to push additional products onto consumers.

3. Over-reliance on, and inadequate oversight of, payment and product technologies.

a) Systems may be unable to withstand growing transaction volumes and adapt to new consumer/user demands.

b) Consumers may not be aware of risks associated with online or mobile platforms, including financial crime risks (such as breach or theft of personal information, fraud or scams).

c) Technology reduces consumer choice and access due to online interfaces having an adverse impact on the framing of products.

d) Firms have not developed suitable controls around technologies that use Big Data to build intelligence and to inform decisions around pricing and access to products.

4. Shift towards more innovative, complex or risky funding strategies or structures that lack adequate oversight, posing risks to market integrity and consumer protection.

a) Firms’ funding structures or sources of funding may adversely affect market integrity

b) Firms’ funding structures

c) Firms’ governance and oversight arrangements may not have been developed, and therefore may not be compatible with new sources of funding

5. Poor understanding of risk and return, combined with the search for yield or income, leads consumers to take on more risk than is appropriate.

a) Low consumer awareness of the risks associated with high-yielding products

b) Consumer focus on brand

c) Firms that provide inaccurate or misleading assessments of risk and return to consumers

Background: The Guardian

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Posted 28th March 2013 by David Jacobson in Financial Services, Risk Management