David Prosser: Starting over on protecting consumers

Outlook There will be many in the financial services industry who will welcome the intention of the Financial Services Authority to intervene much more actively in product design. On the face of it, a requirement to get FSA approval for everything from mortgages to investment funds looks like a pain in the neck for providers of such products. In practice, it might take a great deal of the guesswork out of compliance.

The FSA has always been nervous about insisting on giving its approval for financial products – not least because consumers might think that anything with a stamp from the regulator carries no risk. Instead, the focus of regulation has been on the sales process, with product providers and advisers expected to ensure that customers are only sold things that are suitable, or at least that the risks are fully explained.

Logical enough, but the approach hasn't worked. There has been a string of scandals, from mortgage endowments to precipice bonds to split-capital investment trusts, and each one has had to be resolved with investigations that have been expensive and time-consuming for the financial services industry, and frustratingly slow for those consumers claiming compensation.

Moreover, many in the business believe these scandals are always judged by the standards of today, rather than those that applied when they were selling the products in question. That's not just irritating: it also makes planning for future compliance all the more challenging.

Lord Turner wasn't clear yesterday on exactly how the FSA might become product regulators. But you can imagine that all products might have to meet certain standards set by the FSA – and that there might be clear rules about who certain types of product could be sold to.

Clearly, there would need to be some flexibility in the system. Some products are more likely to be stars in a future mis-selling scandal than others and it will be impossible, in any case, to prescribe exactly who is suitable – and who is not – for every type of financial service.

The FSA would also have to go on regulating the sales process, no doubt, though presumably not so closely, if most of the scope for mis-selling could be snuffed out before the selling commences. Customers too, would have to accept a degree of personal responsibility.

Much to work on then, but for all the good intentions, it now seems obvious that the current system of product regulation has not worked as well as hoped. Consumers do generally get the compensation they are owed, but the very fact that such situations arise implies a failure of regulation in the first place. And if we're overhauling regulation of the financial system, let us rethink consumer protection too.