of financial innovation growing beyond consumer expectations and hence, contributing to financial system vulnerability. let me emphasize that the basis of all product design and financial innovation should be consumer need. products and processes should be created only to meet specific expectations of consumers. the ability to orient the products and services to consumer expectations would determine the success and sustainability of organizations and markets. 12. as i mentioned earlier, very often financial engineering creates complex products out of inherently simple products. this is very common in the world of structured financial derivatives, where the payoff profile and risks inherent in the structure are significantly different from those of its underlying constituents. when such product design is combined with aggressive sales practices led by perverse compensation systems, it leads to mis - selling to gullible consumers. the end result is a slew of consumer disputes, resulting in loss of reputation for the financial service providers. 13. the sergeant review of simple financial products in the uk has identified four attributes for financial products to be classified as “ simple ” viz. • the products should help consumers benchmark and compare with other products in the market. • the product must be understandable and accessible to the mass market. bis central bankers ’ speeches • the product must not be tailored to meet individual needs, but provide consumers with confidence that the product will meet their basic needs and offer them a fair deal ; and • the product will be a viable commercial proposition for the provider. 14. financial sector regulators / supervisors and consumer protection bodies need to keep a close watch on product design and financial innovation in order to ensure that these are oriented towards consumer needs and expectations. market intelligence mechanism should also focus on identifying products which could, potentially, expose consumers to unintended outcomes. individual financial service providers should also have internal frameworks for vetting new product offerings so as to ensure that they are in alignment with regulatory requirements and consumer expectations. in fact, an assessment of the financial products and services for their reasonableness and suitability to customers is going to be one of the main planks for the financial conduct regulators under the twin peaks structure. how to ensure that the consumer voice is heard 15. though consumers are the core around which the entire financial services business revolves, the consumers ’ voice is the feeblest and, very often, not heard. this inability to understand the consumer and his needs is the genesis of all consumer protection issues. there are a number of ways in which the consumer voice in the financial regulatory system could be strengthened, not just in the

##s over the business cycle and maintains that fiscal discipline over time is the will of the political system to make the necessary hard choices on government spending and taxes. one possible means of expressing that will, would be for the congress to reinstitute a set of budget rules, possibly along the lines of the discretionary spending caps and the paygo rule originally included in the 1990 budget act ; these rules may assist in the process of making the difficult choices among competing budget priorities. however, although the paygo budget rule, for example, appeared to help keep legislation from increasing federal deficits for a number of years, paygo did not provide a mechanism to deal with the long - term budget imbalances already in place. thus, it is worth considering whether future budget rules should go beyond the scope of paygo and require more fundamental adjustments to spending and taxes. clearly, there are numerous ways in which budget policy could be adjusted to bring the budget back into balance in the short run and to maintain it over the long run. in any event, these difficult choices must ultimately be made. if left unchecked, persistent and widening federal government deficits will have an increasingly corrosive effect on the u. s. economy because, all else being equal, federal government borrowing takes up some of the funds that would otherwise go to finance capital accumulation or to purchase capital assets from abroad. a good deal of controversy has swirled around the question of whether increased federal borrowing reduces domestic investment, and presumably increases interest rates, or whether it increases u. s. borrowing from abroad. viewed from a broader perspective, however, that distinction is probably not very consequential because future national income is lower in either case. for the federal government to run a deficit in the short run as a temporary response to an emergency event, such as the recent devastating hurricanes, or a recession or a war is not the type of fiscal policy imbalance that tends to have a negative long - run effect on an economy. to the contrary, appropriate discretionary fiscal responses to these types of situations can have beneficial economic effects, as i suggested earlier in my remarks. however, it is imperative that the nation come to grips with the fiscal implications of the retirement of the baby - boom generation. creating a budget strategy and implementing policy changes to balance the federal government's budget over the long term will require hard choices, which will become more difficult the longer they are delayed. moreover, changes made to federal government spending programs and taxes to