CAT Standards and Stakeholders: Their Role in Financial Regulation

Abstract

As well as creating a new single regulator, the Financial Services Authority, the current government has been very active in introducing and championing other regulatory measures. This paper looks in particular at the arguments for the different types of product regulation and benchmarking associated with the introduction of Stakeholder Pensions and with CAT standards for mortgages and for ISA's. At first sight these initiatives appear to sit uneasily with the goverment's reliance on makeing markets work better through promoting competition and consumer information. This strategy it appears to be following in other industries and thourhg othe intiatives in the financial services sector. The core argument of the paper is that both better consumer understanding and government are likely to be needed in the financial services sector. Too many actual and potential consumers of financial services have too much difficulty understanding the complexities of the products on offer for education and disclosure requirements to be effective on their own. Low levels of genereal numeracy add to the problem. The difficulties of aligning the incentives of advisers with those of their clients are also severe. Moreover this is an increasing problem as more and more people are expected to rely on their own pensions and other savings as the state withdraws from provision. Benchmark product standards provide an extra element of safety, especially for those with lower incomes and lower levels of financial understanding. Consumer education and disclosure are likely to benefit the more financially sophisticated most directly, but importantly will also be needed to make the new product standards work. There remains a real problem for government in how it should promote the benchmark products. Without promotion from some quarter they may not be widely understood and used. Yet it is very risky for government to promote equity based products in a generic way.