FSA strikes back on Lehman structured products
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On Friday the regulator said it had uncovered serious issues in its review and will report back on the outcomes in more detail in October though it has given the Ombudsman the go-ahead to review individual complaints relating to the products.
As part of its review, the FSA has focused on promotional literature, clarity of information, quality of advice, sales systems and controls, involving plan managers, providers and advisers.
In an update on Friday FSA retail policy director Dan Waters said it was a “hugely complex area” and there was still more work to be done but that regulatory action could progress alongside the Ombudsman’s adjudication of individual complaints.
The Ombudsman says the timescale for resolving complaints will vary with the issues uncovered in each case but some may be dealt with quite quickly.
Structured products from NDFA, DRL, Meteor and Arc are among those affected by Lehman's collapse.
To date the Ombudsman has received 160 complaints about Lehman-backed products but it is estimated that £200m was invested by around 6,000 people in savings products backed by the bank.
If the client was misled as to the level of risk they were taking on, for example through the marketing literature of plans, they will potentially have some recourse.
However, some of the 6,000 clients will have invested with full knowledge of the risk they were accepting and here the adviser or the provider should not be held responsible for the client’s losses. But there is concern the FSA and Financial Ombudsman Service may not see things this way.
The FSA says firms must ensure they meet regulatory standards on marketing literature for different investment products, including structured products, to ensure it is clear, fair and not misleading.
It says it would pick up on any failings on this as part of supervision of firms but it stresses that it does not pre-vet any promotional material for any products and it is not its role to do so.
Baronworth Investment Services director Colin Jackson says: “The people who are probably the prime target for the FSA are those who offered the products on an advisory basis. But if you were offering a Lehman Brothers product before the bank blew up, at that time you probably could not be criticised. It was a big bank with not a whiff of trouble so you can only be criticised legitimately if you misled the client. If the literature is well produced and fairly produced and the company you are dealing with at the time is thought to be reputable how much further can you go?”
Lowes Financial Management managing director Ian Lowes says: “It has been inferred that a pivotal time in the crisis was in March following the developments with Bear Stearns. Certainly up until that point and possibly after anybody that recommended a Lehmans-backed structured product could not have foreseen the bank’s collapse as anything other than a low risk possibility.
“That said, even though it was extremely low risk if the adviser didn’t make it clear to their clients that the plan’s payout was dependent on the solvency of the counterparty, whether it was named or not, then they are going to be feeling the long hand of the FSA.”
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Readers' comments (5)
HeeBee | 14 Sep 2009 6:35 pm
FSA/ Lehman
I am an outsider, not part of the UK system. Maybe I am over-simplifying the situation, but it seems to me that if the FSA has approved a fund for distribution to the UK retail investor, it has carried out due diligence. The advisor's role is to ensure that the fund fits the client's risk profile, not to perform due diligence - the FSA has done that already!
If the fund fits the client's risk profile and has been approved by the FSA, then subsequently proves to be a dog with fleas, the FSA is responsible, not the advisor.
The FSA's energy into the investigation into IFA's promotion of Lehman's structured products should be directed at the FSA's approval of these products in the first place.
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Simon Webster | 14 Sep 2009 6:36 pm
FSA Strikes Back
As ever it is not the FSA's fault so it must be someone else's. However there are 2 issues: neither govnernment nor international regulators saw a problem with Lehams so why should advisers be penalised? However some advisers sold structured prodicts that were unsuitable full stop - Lehman backed or not - adn that is a cause for real concern..
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Evan Owen | 14 Sep 2009 8:04 pm
Where was the regulator?
Isn't a regulator supposed to regulate before the event rather than kick some proverbial butt after the event? Most of these 'structured' products are like a bag of snakes, finding the counterparty is a bit of a struggle. Then, if a foreign country (US) refuses to prop up its failing bank the rest of the world (including FSA territory) carries the can. This is not fair is it? Let's take out the obligatory adviser's crystal ball, let's forget the very nature of these 'structured' products, let's focus on the responsibilities of the omnipotent regulator, the Leviathan. Who fancies a crack at that? I will wager that nobody will take it on, no guts, too many skeletons in cupboards more like. Go on, surprise me, make a stand.
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Jim Payne | 15 Sep 2009 11:02 am
Dual standards
I have not seen the marketing literature, not having a client base to make this of interest, but suspect that any reference to Lehmans in promotional material would have suggested that their involvement was wholly beneficial to prospective clients/investors. Any advisor, before the collapse, would have expected to use the Lehman name as a very positive USP, (Unique Selling Proposition) great for credibility and indeed almost a guarantee of the solidity of the schemes.
Whatever the outcomes of the FSA's enquiries of this 'hugely complex area' it will come down to whether advisers should, before the collapse, have had the prescience to have warned clients of the potential problems should the counterparty fail.
Arguably the FSA, as regulator, was, within the UK, in the best position of all to have known of the risks to Lehmans in the preceding months. Despite my questioning of the FSA's basic competence in most things to do with advice one cannot expect them to have had that much foresight.
This does however raise the question of why the FSA suggests that advisers should have clearly spelt out potential risks, even those of which the FSA itself was unaware.
By 'allowing' the FOS to now proceed on individual complaints the FSA appears to be operating in consumers interest.
However there are 'only' some 6,000 people who have been potentially mis-sold to and/or incorrectly advised and big Banks can take any possible losses on the chin while smaller advisers, not having sufficient muscle to challenge the FSA, are routinely disregarded.
Contrast this with the fact that the FSA has still not lifted the 'hold' on complaints to the Ombudsman on Bank Charges. Despite the fact that the Banks have lost all Court cases on these to date and now await an appeal to the House of Lords! The reason presumably being that their precious friends in those banks would then have to refund billions in charges and additional interest. All this could have been settled before the Banking crisis if there had been the will to do so.
Now of course the FSA will trot out that such large potential pay outs may imperil the Banking System once again. So what does the FSA think it is, a regulator of Markets and the firms that make up and operate in those markets or a Consumer Protection Agency?
As is amply demonstrated here there is a clear conflict of interest which is the best reason for the Authority to be liquidated. Regulation to the BoE and consumer protection to a beafed up Office of Fair Trading.
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Phil Castle | 15 Sep 2009 3:05 pm
I agree with
all the sentiment of comments below. But then the F-pack is not a democracy, so it doesn't matter what the majority of the industry think is the truth of teh matter, the FSA will do what suits the FSA.............
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