UK watchdog wants an "innovation heaven" in financial products

* Watchdog looking to tear down barriers to innovation

* Wriggle room limited by tougher EU consumer safeguards

* Wheatley warns there won't be return to light touch

By Huw Jones

LONDON, May 29 (Reuters) - Britain's markets regulatorpledged on Thursday to offer a more sympathetic ear to financialfirms wanting to develop new products that help customers savefor their old age.

Martin Wheatley, chief executive of the Financial ConductAuthority (FCA), struck a more conciliatory note after lawyershave criticised the year-old watchdog for being heavy handed andeffectively vetoing new products.

The FCA was launched in April 2013 to protect consumersbetter after a string of mis-selling scandals ranging from loaninsurance to pensions spanning several decades.

Wheatley outlined plans to encourage more innovation infinancial products, especially around rapid advances intechnology such as using mobile phones for banking andinvestments online like "peer to peer" lending.

He said a market that works well is one that allows formuch-needed innovation as the "middle ground" of consumers werenot being served well, partly because firms argue that a welterof new rules make it harder to come up with new products.

The need for innovation is also being fuelled by the UKgovernment's decision to end compulsory annuities for peoplewith retirement pots after the FCA called the market disorderly.

The FCA's predecessor had told the industry to be "veryafraid" but Wheatley said this was at the height of the 2007-09financial crisis when taxpayers had to rescue banks.

"The tone is different because I think we recognise that ourcore objective of making markets work well is not just served bylocking down everything that could go wrong," Wheatley told aBloomberg News event.

Next month the FCA will begin a public consultation on howlimited or simplified automated advice could be given tocustomers online without the financial firm having to complywith the full panoply of regulatory safeguards.

The watchdog will look at ways to make disclosures tocustomers more meaningful, Wheatley said as he criticised anunnamed bank for having terms and conditions on its basic bankaccount that are longer than Shakespeare's Macbeth.

INNOVATION HEAVEN

The FCA will identify barriers to innovation and set up ahub to give compliance advice for innovative products. Therewill also be an "incubator" to support innovative businesses asthey seek authorisation from the watchdog.

Wheatley said London has the capacity to become a Europeantrendsetter in a booming tech scene and create an "innovationheaven", though there won't be a return to the pre-crisis "lighttouch" regime.

"We want firms to have the freedom to break new ground, butthere is limited societal appetite to accept more scandals inthe industry," Wheatley added.

As economic recovery gets underway, there is also risk thatover-confidence sets in with lobbying to unpick reforms, whichwould be dangerous, he said.

The FCA's wriggle room to encourage innovation and offer"waivers" from some rules will be limited by the European Union,whose financial watchdogs are already moving onto the retailturf, encouraged by national supervisory failures in the past.

The European Securities and Markets Authority (ESMA), and EUwatchdog, will get powers to go over the heads of nationalsupervisors to ban a harmful products. Transparency anddisclosure requirements in markets covered by EU rules, such asmutual funds, are also being toughened up.

"Clearly where there is very definitive rules in theEuropean framework, then they have to be complied with. Ourflexibility will be to look at principles and outcomes as muchas we can," Wheatley said. (Reporting by Huw Jones; editing by Susan Thomas)