Banks must simplify products to avoid regulation

Investment banks need to simplify the products they are selling and investors should take more responsibility for understanding complex products to prevent more regulation in London, a committee of lawmakers said yesterday.

The Treasury Select Committee of cross-party politicians said turbulence since August had exposed "serious flaws" in the financial industry that has seen a dramatic growth of markets in asset-backed securities and a shift towards banks dispersing risk more broadly.

The flaws include "growing product complexity and looser underwriting standards as well as increased uncertainty about where risk ultimately lay within the system," the committee said in a report.

The committee said the Bank of England and the Financial Services Authority (FSA) had warned of potential risks from a credit crunch early last year, but banks did not heed their warnings.

"It is clear that some market participants did not heed these warnings and that the framework for issuing warnings of potential problems needs strengthening," it said.

In future the Bank of England and FSA should highlight two or three of the most important risks in a letter for financial firms to discuss at board level, the report said. They should obtain confirmation of the warnings and publish commentaries on the responses.

Credit rating agencies were also criticised in the report for "inherent and multiple conflicts of interest in the credit rating agencies business model", which resulted in a failure to spot and explain the risks. They must tackle these issues "as a matter of urgency" the report said.