The Building Societies Association (the BSA) represents mutual lenders and deposit takers in the UK including all 46 UK building societies. Mutual lenders and deposit takers have total assets of over £375 billion and, together with their subsidiaries, hold residential mortgages of £245 billion, 20% of the total outstanding in the UK. They hold more than £250 billion of retail deposits, accounting for 22% of all such deposits in the UK. Mutual deposit takers account for 31% of cash ISA balances. They employ approximately 50,000 full and part-time staff and operate through approximately 2,000 branches.
The BSA is pleased to provide comments on CP12/35 (the CP), which consults on when and how the Financial Conduct Authority (FCA) may make temporary product intervention rules.
For our general views on product intervention, please refer to our response to DP11/1:
BSA response to FSA DP11/1
• The BSA acknowledges the need for temporary product intervention rules, but remains concerned about the potentially detrimental impact on product innovation.
• More guidance and clarity is needed on the precise circumstances when the FCA would seek to use temporary product intervention rules.
• The FCA proposals for ensuring awareness of new temporary product intervention rules are inadequate. Wherever possible firms should be contacted direct and in advance of the introduction of any rules. It is not adequate to simply post the rules on the FCA website and hope that all firms and the media will notice and act immediately.
• The FCA must ensure it gives clear guidance to existing customers of products subject to temporary product intervention rules. A temporary product ban may lead to a significant jump in customer contact with firms and this would need to be properly managed.
Q1: Do you agree with our analysis of some of the circumstances in which temporary product intervention rules might be necessary?
A1: Yes we agree that the broad scenarios set out 2.9 and 2.10 of the CP would, dependent on the details of an actual case, justify the use of temporary product intervention rules. We recognise the difficulty in being able to provide complete certainty around how and when the FCA will use temporary product intervention rules in the future, but we believe that greater clarity and guidance, beyond that set out in the CP and draft Statement of Policy, is needed.
Unless the high level circumstances for the use of intervention powers are ‘fleshed out’, there is a risk that product innovation will be stifled as firms may opt for an extremely cautious approach. Product development is costly and firms will be wary about innovation if they are unclear whether or not their new product may be subject to a ban. The reputational and financial risks of being first to market with a new innovation may be too great for some firms. The BSA would be happy to work with the FCA on producing industry guidance giving more detail on the precise circumstances when the FCA would seek to exercise its powers.
Q2: In what other circumstances might it be necessary to make temporary product intervention rules?
A2: The examples in 2.9 and 2.10 of the CP are very broad and would capture a wide range of circumstances. We do not believe that there are any other circumstances where it would be necessary to make temporary product intervention rules.
Q3: Will our proposed approach create an appropriate level of awareness amongst firms affected by temporary product intervention rules?
A3: No the proposed approach will not create an appropriate level of awareness amongst firms affected by temporary product intervention rules. Asking firms to constantly monitor the FCA website in case a new rule is made and then potentially react immediately is unreasonable. We would expect the FCA to contact all affected firms directly, perhaps via a Dear CEO letter, and give firms a short but reasonable time to prepare before the date of implementation. At the very least, we expect the FCA’s “reasonable endeavours to ensure that information about the rule is communicated as widely as possible” would include contacting a relevant trade association, such as the BSA, to ensure that their members are notified.
The FCA should not rely on the likelihood of significant media interest to help raise awareness of the introduction of a new temporary product intervention rule. For example, a rule which relates to a niche product affecting only a small number of customers would not necessarily be of interest to the press.
Q4: How should the FCA balance the need for clarity and awareness in the market against the likely need for urgent action when making temporary product intervention rules?
A4: We recognise that there is a balance to be struck between the need to take urgent action and the need to ensure reasonable market awareness. We accept that in certain circumstances it may be impossible to ensure total market awareness at the time the FCA intervenes. However, it would be extremely rare that in the build up to taking urgent action on an issue there would not have been several warning signs and opportunities to brief the industry on the FCA’s concerns. FCA intervention should never be a total surprise. Any products or product features which cause the FCA concern should be brought to the industry’s attention through FCA speeches and directly with product providers long before it is felt that drastic action is required.
The process for the making of temporary product intervention rules, as set out in the draft Statement of Policy, sets out the Committee and Board stages for making a decision to act and also states that wherever possible the FCA will seek the views of the Practitioner, Consumer and Business Practitioner Panels. Although this process could be extremely short, we believe that there would still be an opportunity to at least brief and preferably seek the views of industry. While we acknowledge that there is building society representation on the Panels, we believe that there should be a more formal requirement to seek the views of the industry trade body. At the very least, paragraph 39 of the draft Statement of Policy regarding informing the Panels should be extended to include informing the relevant trade association. Trade associations could then, subject to any issues of confidentiality, brief their members in advance of the introduction of a rule.
The importance of raising awareness of an intervention should not be underestimated. Without adequate time to prepare, particularly if there is no time to brief branch and call centre staff of an intervention, firms will be caught off guard and this could exacerbate problems. If awareness is low, branch staff may continue to sell a product in breach of the intervention rule or, faced with a concerned customer, give incorrect advice. It is not inconceivable that following the urgent introduction of an intervention rule and after significant media interest, firms will be faced with a large number of consumer queries. The inability to quickly ramp up the number of branch and call centre staff to deal with this sudden influx may result in unnecessary customer concern and potentially serious detriment to the firm’s reputation.
We would therefore argue that the draft Statement of Policy should state a minimum notice period for firms before implementation of any intervention rule. More than the minimum notice period should be given in all but the most urgent cases. Where little or no notice is given, the FCA must justify its decision and allow firms to challenge it.
Q5: How can the FCA best protect consumers who hold products which might be affected by temporary product intervention rules?
A5: If the FCA concludes that the need to protect potential customers is greater than the potential harm to existing customers it must ensure that its decision is clearly communicated to existing customers with advice on how best to minimise any detriment. This may include advising customers to immediately seek independent advice before making any decision about what to do with the product. If the intervention only relates to one aspect of a product it is possible that the customer may still be able to rely on and benefit from the rest of the product. If the customer were to immediately get rid of the product they may end up causing themselves more harm than necessary. Customers are likely to contact their firm for advice or further information. As stated above, it is essential that firms have a reasonable lead in period to prepare and brief branch and call centre staff before implementation of any rule.
Q6: Do you agree with our analysis of how temporary product intervention rules might impact upon innovation and market entry?
A6: While we recognise that there will be circumstances where the use of product intervention and, on very rare occasions, temporary product intervention rules is justified, we remain concerned about the potential impact on product innovation.
As acknowledged in the CP and above, firms may be unwilling to invest in product development if there is a risk that a new and untested element of the product could be subject to intense investigation and potentially an intervention or ban. The reputational and financial risks of an intervention would put many off trying anything innovative no matter how beneficial a new type of product would be for consumers. This would be bad for competition and would harm consumers as well as firms.
Perhaps the best way to mitigate against the deterrent effect of product intervention rules on innovation would be to give firms confidence about how and when the rules will be applied. The draft statement is simply too vague as currently drafted, particularly on the broad circumstances listed which would justify FCA intervention. More detailed guidance for industry is needed. The BSA would be happy to contribute to any discussions on industry guidance. We would also expect to be consulted on any future significant revisions to the Statement of Policy.
Q7: What issues should we consider in relation to how this Statement of Policy affects equality and diversity?
A7: We would argue that the Statement of Policy could have an impact on minority and religious groups in addition to the vulnerable consumers identified in the CP. For example in the last decade, a number of financial institutions have brought Islamic Home Finance products to the UK market. This innovation serves the needs of a minority group who might otherwise be excluded from purchasing their own homes as the traditional mortgage model is not appropriate. It is not clear whether firms would have taken the risk of introducing these products had temporary product intervention rules been in place at the time, especially as these products are so different from the traditional model.