Financial watchdogs to issue 'health warnings'

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Financial watchdogs are set to start issuing health warnings about financial products within weeks in an attempt to draw a line under a succession of scandals which resulted in billions of pounds in compensation being paid to aggrieved consumers.

The warnings will be publicised in the media and on the FSA website but regulators have not ruled out applying cigarette-style health warnings to product literature.

And they are set to keep a close watch on profit margins, particularly on complex products, with price caps not being ruled out.

The moves are part of an increasingly hard line approach being adopted by the Financial Services Authority, whose consumer protection and markets functions are to be transferred to a new Financial Conduct Authority. It comes in response to a series of mis-selling scandals including endowment mortgages and payment protection insurance.

On Tuesday the watchdog said financial firms paid £215m in compensation to people mis-sold payment protection insurance policies, which were typically attached to personal loans and were in many cases sold even if they were useless to the buyers, in the first half of 2011.

Margaret Cole, the FSA's enforcer-in-chief before assuming the role of interim managing director of business conduct, has voiced particular concern about so-called structured products, which often involve derivatives and which even regulators have trouble understanding, let alone consumers.

The FSA has in the past steered clear of product regulation, preferring to focus on how products are sold. But this has been criticised because it often means action is taken many months after the sale of unsuitable products. The complaints process – which demands consumers first contact the firm who sold to them – can take a long time.

The close attention being paid to the profitability of products is likely to cause alarm in the industry. Where it is too high, Ms Cole has argued, it can be seen as a "red flag" warning of problems.

So-called structured products often carry very high margins as did the payment protection insurance products that have been the subject of so much controversy in recent months.

Swift trade fine scrutinised

The City watchdog faces a battle before the independent Financial Services & Markets Tribunal over its decision to hit Canadian firm Swift Trade with an £8m fine for market abuse.

The Financial Services Authority alleges that Swift Trade, which is not authorised, "systematically and deliberately" engaged in a manipulative form of share trading know as "layering".

The watchdog will tell the tribunal that, between January 2007 and January 2008, this caused a succession of small price movements in a range of London shares. Profits of more than £1.75m were made.

Swift Trade was voluntarily dissolved last December. The company and its CEO, Peter Beck, are challenging the FSA's decision to publish its decision notice.