It’s imperative that the market for retail financial services be made more fair, otherwise regulators will be forced to become more intrusive, says Callum McCarthy, the chairman of the U.K.’s Financial Services Authority.
In a recent speech, McCarthy said that an efficient market needs competent customers, relevant information, and responsible producers, and that significant progress is needed on each of these. He warned that 20% of adults don’t understand percentages, that industry disclosure is poor and that its record of responsibility is not stellar. “Too often the product, already complex, is made still more complex by a specialised and difficult to understand vocabulary,” he noted. “Nor is the record of financial providers as responsible providers a distinguished one.”
“Faced with this set of problems, there are two possible paths: one is to accept that the retail market needs greater intervention and regulation to make up for its inefficiency, and to accept that the information asymmetry between provider and customer is so great that caveat emptor cannot apply; the other is to identify and make effective those actions needed to improve the market,” he warned.
McCarthy said that the second path is the regulator’s preference, but he admitted the educational task is huge. “It will require a generation to make the necessary progress,” he said, but, “Progress on the supply side should be quicker.” That means mandating better disclosure, and progress towards better standards of responsibility, “… partly driven by enforcement action against firms which act irresponsibly; partly driven by encouragement to firms to act responsibly towards their customers: to treat complaints seriously, and as a source of information about problems to be solved rather than as simply a nuisance; to devise incentive systems for sales forces which encourage responsible rather than irresponsible behaviour; to look at a retail customer on a longer term basis than simply an immediate commission sale.”
“It is important that we succeed in creating this market in retail financial services since the alternative is deeply unattractive,” McCarthy said. The alternative would be a world, “where caveat emptor was replaced by compensation [to clients for unfair dealing]; where the transactions were governed by regulation which would become more intrusive; where the costs of doing business would therefore increase; and where financial products were therefore available to a smaller proportion of society. You will see why I am so determined to make the alternative – an efficient retail market for financial services – a reality.”
http://www.fsa.gov.uk/pubs/speeches/sp200.html
Financial markets need to be made more transparent
Huge task ahead to educate investors says FSA chairman
- By: James Langton
- October 1, 2004 October 1, 2004
- 13:55