tag:blogger.com,1999:blog-19649274.post1811459359093770935..comments2024-03-19T12:52:03.531+05:30Comments on The Leap Blog: Mis-selling: from impressions to evidenceAjay Shahhttp://www.blogger.com/profile/03835842741008200034noreply@blogger.comBlogger1125tag:blogger.com,1999:blog-19649274.post-70096328407893260142013-05-04T09:21:36.858+05:302013-05-04T09:21:36.858+05:30I think this blog post raises some very important ...I think this blog post raises some very important issues that need careful debate. I agree with the author that there is a great deal of misselling in progress and that the recently published report of the FSLRC offers, for the first time, a framework that could start to move us in the required direction, particularly by identifying the right of the consumer to suitable advice. However, I feel that there are multiple issues that have been raised in the post which need to be carefully separated out. I want to focus in particular on the issue of simplicity that is raised by the author.<br /><br />The author expresses a concern that the regulators are weak, customers are unable to get any redress, and there is low level of literacy amongst the providers, the distributors, and the customers. She then goes on to suggest that given all these problems perhaps there is a need for “simple” products that are exempt from suitability standards. I would like to argue that there are no simple products only suitable ones and unsuitable ones and that there are no “universally suitable” products. An apparently simple product like a fixed interest rate loan with a fixed repayment schedule adds an enormous amount of leverage to an individual’s balance sheet and has the risk of rendering her net cash-flow into one that has the riskiness of a stock-option portfolio. This interactive nature of financial products is what makes them fundamentally different than physical products with fixed characteristics. Simplicity is also a not a well-defined idea and in the hands of highly risk-averse regulators will not only kill much needed innovation but will become another tool for exclusion. <br /><br />The way I see it there is no way around a strong regulator implementing well designed regulations with a high degree of fidelity. There are a number of design problems which keep regulators very busy without really achieving much and there has to be a continuous attempt to address them so that regulators do have the time to focus on important issues such as customer protection – the effort of the FSLRC represents one such attempt. Giving up on the requirement of strong regulators essentially amounts to accepting an unregulated financial system even if the regulations are well designed. The imposition of simplicity as a design principle as a response to weak regulators I feel in addition risks doing away with the core the benefits financial services can offer to their clients. <br /><br />My experience on the ground is that households need significant innovation / complexity of product design which allows them to “cancel out” the real-sector volatility in their lives. Disallowing such products to develop in my view is equivalent to banning a much needed new cancer medicine because of concerns that the FDA cannot frame and implement guidelines that prevent misuse of the medicine or contamination in its production. Suitability as a principle supports a high level of innovation in product design but requires the provider to ascertain suitability carefully through a well laid out pre-sale process and enjoins upon the regulator the responsibility to ensure that this actually happens using a number of tools. To my mind this approach has the power to deliver the true value of finance to households and enterprises while offering a high degree of protection against misselling. <br />Nachiket Morhttps://www.blogger.com/profile/09848565938834488882noreply@blogger.com