FSA finds weaknesses in design of structured products
Share
The FSA has published guidance for structured product providers after finding weaknesses in the way firms are designing and approving these products.
Between November 2010 and May 2011, the regulator carried out a review of seven major providers of structured products, responsible for approximately half of the structured products in the UK retail market by volume and value.
It found that although there were some improvements, weaknesses remained in the way firms are designing and approving structured products, which the FSA says increases risk to consumers.
Following this review, the FSA has published a guidance consultation for firms to consider when designing structured products and as part of the after sales process.
It says firms should identify the target market and design products that meet those customers’ needs, stress-test new products to ensure they deliver fair customer outcomes and ensure a robust new product approval process.
Firms will also be expected to monitor the progress of a product through its life cycle.
FSA head of conduct supervision Nausicaa Delfas says: “A lack of robustness in a firms’ product development and marketing processes can increase the risk of poorly-designed products and lead to misselling.
“Many of the problems we found with the product design process were rooted in the fact that the firms are focusing too much on their own commercial interests rather than the outcomes they are delivering to consumers. Where we found problems we have taken action with the firms involved.
“This work is a further step towards intervening earlier in conduct regulation and demonstrates that the FSA is already seeking to identify potential consumer detriment at a far earlier stage.”
If you enjoyed this article, sign up here to receive daily email updates from Money Marketing and Follow @_moneymarketing
Readers' comments (6)
Peter Herd | 2 Nov 2011 11:31 am
Why can't the FSA's ban these products altogether as they always designed to benefit the product provider and never to benefit the consumer.
These products are always marketed in an eye-catching manner and risks of them are always understated.
The bill for these failed structured products don't end up on organisations that sell them by the masses they end up on the IFA's desk who normally wouldn't touch these products with a barge pole.
Unsuitable or offensive? Report this comment
Anonymous | 2 Nov 2011 3:23 pm
someone is punting or there wouldnt be so many of them selling like hotcakes
Unsuitable or offensive? Report this comment
James Espin | 2 Nov 2011 8:31 pm
@ Peter Herd
I'm afraid your comments show a great degree of naivety, structures may not be the cheapest or most transparent products on the market but there are many many occasions where their return would have far exceeded that of direct collective investment.
Ok I accept they are not for everybody but they have their place in providing a risk-adjusted return which sometimes looks far more favourable than direct investment.
Unsuitable or offensive? Report this comment
Evan Owen | 3 Nov 2011 7:17 am
"FSA finds weakness", after the event of course.
The majority of us saw the weakness before the event, the FSA is good at writing reports, creating pie charts and graphs. The only problem is that the whole machine is pointing in the wrong direction.
Unsuitable or offensive? Report this comment
Anonymous | 3 Nov 2011 9:30 am
Either these are "100" principal protection on maturity" / "capital guiaranteed" etc or they are not. No room in the financial industry for misleading headlines and product promotions which subsequently prove to be completely fictitious, with high levels of product complexity - ultimately at great cost to the investor...
Unsuitable or offensive? Report this comment
Peter Herd | 6 Nov 2011 12:57 pm
Sorry James but your comment is the one that shows naivete as I have no clients who have suffered capital loss through one of these providers going bankrupt on a so-called guaranteed product.
In fact I personally believe that these products sued advisers who are looking for a lazy way of making a recommendation rather than educating clients on proper asset allocation and diversification of the portfolio
If you're selling these things are you really explaining to client the third-party counter risk and if so do your clients truly understand these risks.
Your comment above shows that you hold these products as low risk when in fact they are medium risk at best. I object most strongly to these products being sold as low risk or guaranteed when in fact there are hidden risks within the product that many consumers are totally unaware of as the risks are hidden in small print.
I remember reading a story in my local newspaper about an investor in a Key Data product sold from Norwich and Peterborough who was told that this product was cast-iron guaranteed and had no investment risk. She nearly lost the entire £200,000 until Norwich and Peterborough fully compensated her under their proposed deal.
I am not naive in fact I refused point blank to sell these products when working for a major bank and in fact nearly got disciplined over my refusal. I subsequently left the bank to set up by independent practice. In fact I campaign quite vigourously against these types of products and have posted on here my campaign against Chelsea building society is protected product and it's misleading posters,
http://essentialifa.wordpress.com/2010/11/18/chelsea-building-society-misleading-18-capital-protected-bond/
Unsuitable or offensive? Report this comment