Financial Conduct Authority
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FSA publishes further independent research on the benefits of financial regulation

The Financial Services Authority (FSA) has published today independent research which indicates the benefits of the suitability letter. This will help inform the FSA's decision whether to retain its requirement for firms to provide information on product suitability to consumers.

The FSA commissioned Oxera, an independent economics consultancy, to assess the benefits of its suitability letter requirement in response to Deloitte's 2006 report on the cost of regulation, which found that this rule imposes relatively high costs on the industry. This is the second of three reports being produced as part of the FSA's response, and feeds into the regulator's broader drive to measure the benefits of financial regulation.

Oxera found that suitability letters are an important tool for providing transparency and clarity for consumers for a range of retail investment products. They require firms to explain why a recommended product meets a customer's needs and any possible disadvantages of the transaction. The FSA has proposed that from November this year - when its New Conduct of Business (NEWCOB) regime comes into force - the suitability letter will be simplified through the introduction of a less prescriptive 'suitability report'. In line with the FSA's move to more principles-based regulation, this means firms would have greater discretion over how they should use these tools to ensure consumers understand the pros and cons of buying a particular product.

Dan Waters, the FSA's Director of Retail Policy, said:

"The FSA welcomes Oxera's report on the benefits of our suitability letter requirement. It forms part of our broader aim to make regulation more effective for both firms and consumers.

"Feeding into our evidenced-based approach to policy making, this report offers helpful indicators of the benefits of the suitability letter and supports our overall judgement that the requirement is proportionate. We will be taking forward Oxera's recommendations on how the benefits can be clarified further – including in the next phase of our quality of advice work later this year."

Notes for editors

  1. Oxera's report 'Assessment of the benefits of the FSA suitability letter' is available on the FSA's website.
  2. The third research report on the benefits of financial regulation looks at the FSA's requirements relating to the disclosure of charging information, and will be published in the third quarter of this year. This research is being carried out by CRA International. The first report, also prepared by CRA International, looked into the benefits of the Menu 'An Empirical Investigation into the Effects of the Menu'. This report was published on 31 May 2007.
  3. 'The cost of regulation study', conducted for the FSA and Practitioner Panel by Deloitte, examined the incremental costs – the costs which firms incur to comply with FSA rules – of complying with individual rules in three sectors: corporate finance; institutional fund management; and investment and pension advice. This report was published on 28 June 2006 and is available on the FSA's website.
  4. The FSA will be providing further comment on the findings of the Oxera report in its July Policy Statement covering a set of conduct of business requirements that were held over from rules made by the regulator in its NEWCOB Policy Statement (PS07/6) of 31 May 2007. This set of requirements includes the 'suitability report' provisions, on which the FSA consulted in October 2006 (CP06/19).
  5. 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; securing the appropriate degree of protection for consumers; and fighting financial crime.
  6. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.

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