CATS and Stakeholders where do they fit in?

The paper suggests that the FSAs new consumer education objective derives from the governments general desire to improve competition in markets across the economy. Better informed consumers are better placed to protect themselves and to drive the market to an efficient outcome.

But

• even in association with a comprehensive regulatory framework covering best advice and suitability designed to protect consumers, this is not enough. The complexity of financial products is so great, and standards are so difficult to enforce, especially in the face of the natural incentives created by a commission based sales system that more protection is needed;
• the fact that the government is progressively withdrawing from welfare provision, particularly in the pensions area, has increased pressure on government to ensure that the private sector can deliver good value products to a mass population. Too often the existing system failed to deliver.

Hence the introduction of compulsory product standards for Stakeholder Pensions and voluntary CAT standards for ISAs and mortgages.

Paul Johnson, Head of the Economics of Financial Regulation Department said:

At first sight the introduction of benchmarked product standards appears to sit uneasily with the Governments reliance on making markets work better through promoting competition and consumer information. But the problems of information and incentives in the financial services area are so great that directly setting product standards may well be the best way of ensuring adequate products are available. Benchmark product standards should provide an extra element of safety, especially for those with lower incomes and lower levels of financial understanding.

Consumer education and disclosure remain very important alongside these new standards not least so that consumers can understand their value. The most serious challenge for the government will be getting the message across about what Stakeholders and CAT standards are, without overtly advising people to buy what after all remain risky, equity based products.

Notes for editors

1. The Occasional Papers series, which covers financial regulation and extends across economics and other disciplines, is part of the FSAs commitment to encourage debate among academics, practitioners and policy makers.

2. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the protection of consumers; and fighting financial crime.

3. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.

Appended information

This Occasional paper is available from the publications section of our web site. The direct URL is http://www.fsa.gov.uk/pubs/occpapers/op11.pdf.