UK - The UK's finance minister has unveiled a wide range of proposals concerning financial services regulation which are designed to tighten risk management of the entire UK financial system after the recent crisis, but could also impose some form of ‘traffic light system' style risk warning on pensions.
A white paper has been issued today by Alistair Darling, chancellor of the exchequer, which suggests the government wants to see more emphasis in UK regulation on the monitoring of systemic risks and the firms involved, and banks in particular, so greater powers are being given to both the Bank of England and the Financial Services Authority to influence that.
Most of the proposals relate to recent systemic risk so a key part of reform, according to the Treasury, is to introduce changes which better manage the failure of firms, especially those deemed to be ‘high impact', such as banks, as well as strengthen the infrastructure of markets such as derivatives and securities, to prevent the repercussion and consequences of situations like the Lehman Brothers collapse.
At the same time, however, the Treasury has resurrected an idea which first surfaced some years ago - supported by some Labour MPs and officials at the FSA - for the introduction of a form of ‘traffic light' system regarding the financial risks to consumers of certain retail finance products, including pensions.
It claimed consumers need "additional support and guidance as they engage with providers of the financial services they need to manage their day-to-day lives" so compulsory measures could be introduced to improve the communication of risks to pension plan holders, providing there is sufficient support from the industry.
More specifically, it is proposed the delivery of products could be altered away from imposed terms on charges and accessibility towards a form of product classification or warning system, dependent on the risk it carries.
"One option which the Government believes could be worth further investigation is the "traffic light" system which has been introduced into food labelling. While financial services and food are clearly very different classes of consumer products, there may be important lessons to be learned from food labelling for improving the transparency of financial products."
There is no indication in the paper, however, of whether such a system would have to be placed on occupational pension schemes too, given the role they play in pensions planning.
The government acknowledges that introducing any such system voluntarily is likely to mean most companies will not use it as "for products which would be rated as complex or expensive, there would be a strong incentive on providers not to provide a rating at all".
So it is leaning towards a "nuanced" compulsory system of labelling, partly because there is work at the EU level to try and develop "a harmonised approach to risk ratings for investment products", according to the Treasury.
Doing so, however, could create problems for the government, not least because every type of financial product has different levels of risk within their chosen category and would have to be defined on any scale, but also because it would need to comply with EU law.
A further consultation on this matter will be issued later this year but the full length version of today's white paper is available on the HM Treasury website.