Regulator is taking hindsight approach to counterparty risk
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Advisers have attacked the FSA’s decision to impose a retrospective review of the structured product market following its investigation into Lehman-backed plans.
Independent Personal Financial Management director Luke Gibbon is writing to Conservative MP Anne Widdecombe, urging her to look into the retrospective element of the FSA’s review after she criticised Sir Thomas Legg’s retrospective inquiry into MPs’ expenses.
He says: “IFAs did not really think about counterparties until Lehmans. Action should be taken against bad advice but I get angry about retrospective reviews by the FSA who can pontificate over whether something is done correctly after the event.”
In its review, the FSA insists it was careful not to apply the benefit of hindsight to the period before Lehman’s insolvency. Yet in the “expectations” section, the FSA says advisers should have considered the financial strength of the underlying counterparties in line with customers’ attitude to risk and highlights widespread disclosure failings in this area.
Advisers say the FSA made no mention of counterparty risk in a 2004 consumer factsheet on capital-at-risk products.
John Joseph Financial Services principal John Joseph says: “There was nothing about counterparty risk. They are judging people in hindsight with today’s knowledge.”
The FSA says the factsheet was intended to highlight to consumers some of the risks but it was never intended as a replacement for advice or a tool for advisers. A spokesman says that a retrospective review is justified by the widespread nature of the failings uncovered.
He says: “This is not just simply the issue of whether clients were advised about the underlying guarantee, it is much wider than that and the report points to a variety of failings but also good practice by advisers.”
Chelsea Financial Services head of investment products Matthew Woodbridge says: “IFAs are not credit analysts, so they may have to employ the services of specialists if they want to continue giving advice on retail structured products.”
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Readers' comments (9)
SIMON MANSELL | 6 Nov 2009 11:12 am
Let us remind the FSA about their own statement on retrospective reviews:
The FSA statement entitled 'Clarifying "mis-selling": a note by the FSA', confirms that it is the suitability of the recommendation and the explanation of risk that matters, not the performance of the product. They state clearly that any retrospective redefinition of regulatory requirements is out of the question and that the rules and standards enforced will be those in place at the time of the sale and not some retrospective reconstruction. The FSA concludes by saying that in relation to mis-selling, they will not act with hindsight or invert the burden of proof, which would otherwise apply.
The FSA Position - Papers Issued: Risk and Regulation and Reasonable expectations: Regulation in a non-zero failure world
The FSA has published two more in the latest in a series of occasional papers considering virtually the same subject – Both reports highlight the principle that the Financial Services and Markets Act (FSMA) has objectives that are about consumers (consumer protection and promoting public awareness) and not about removal of all risk from users of financial markets. The FSA says that although it has been stating this fact for some time, commentators appear to consistently overlook it. It reiterates that the consumer protection objective says that consumers should take responsibility for their financial decisions and that it is therefore important that consumers understand that regulation is not a guarantee against loss (FSA emphasis).
Banks fell apart on the FSA watch and it is the FSA that should be in the dock!
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Julian Stevens | 6 Nov 2009 11:54 am
Nothing's changed. The FSA says one thing but does quite another and is never held to account.
Just look at the FSA website with all its phony procalamations about being an open, transparent and accountable regulator, using its resources as cost effectively as possible (there's a sick joke, if ever), undertaking cost:benefits analyses before introducing new regulatory initiatives, consulting the industry on such matters, etc, etc, etc. All hogwash.
The only person in the FSA who declared publicly that hindsight reviews were "not helpful" (as prize a piece of understatement as you could imagine) was Howard Davies, but he left shortly afterwards and his successors have swept that one quietly under the carpet.
The FSA seems fundamentally incapable of anticipating any of the regulatory risks it's supposed to protect against. So what it does instead is regulate by hindsight. Always has and probably always will unless or until it's subjected to long overdue root and branch reform. We live in hope, if not expectation.
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Phil Castle | 6 Nov 2009 1:44 pm
Much of the FSAs Structured Product Report was well reserached and well written (end of positive statements) The negative is that there was no looking at the FSAs own failures so that lessons could be learnt about the regulatory failures of the FSA itself. The consumer facing Factsheet referred to entitled "High Income Products" was withdrawn on 1 April 2008. (confirmed by the FSAs Firm contact centre last week)
This has resulted in my positng the questions below;
1. Why was it withdrawn and why in April 08?
2. Why was it not replaced?
3. Why is there no mention of it's withdrawel and lack of replacement in the recent FSA paper entitled "Quality of advice on structured products Oct 09"?
4. Is there an intention to replace it with an updated consuemr "Factsheet"?
5. If so, when?
If they do NOT already know the answers, then I would say the FSA report is not only incomplete, it is either incompetent or an attempted at buck shifting which in many other situation might be viewed as misrepresentation or even fraud.
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Evan Owen | 6 Nov 2009 3:21 pm
You can't blame anybody else Phil, just as we can't blame Which? for their 'best buy' low cost endowment research that encouraged many thousands to purchase one after reading their magazine or the newspapers which followed up on the tables because Which? was highly regarded. How many IFAs were faced with IWOOT demands from clients or those who took the nortgage out with the banks and ran down the road to an IFA for a 'decent' life office's product? Raking over old coals..
I have to ask who wrote the FSA leaflet I see before me, it wasn't me and that is for sure!
Over the years I have been surprised, no dismayed, by the poor quality of the material which is aimed at the public. Do IFAs really believe that it is free research documentation?
Has anybody had a go with the 'fact-find' designed by the BBC? If it is still there.
There are many things I would like to change, give me a regulatory pen, please..
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Bitter Investor | 10 Nov 2009 9:12 am
Advisers are bitching because they have to look at their own past failings.
I fail to see what is retrospective about the FSA ruling.
The FSA are just getting IFA’s to do what they should have done all along in line with the FSA rule book.
Speak to a good IFA as we have now done and he will tell you that he would never recommend a product with an unknown counter party.
There are numerous aspects of an investment that IFA's should examine and in some cases such as mine I subsequently discovered that our IFA had little or NO understanding of the NDFA Lehman backed structured product sold to us. Our IFA breached FSA rules at seven stages.
Even after the collapse of Lehman's our IFA told us not to worry as we were covered by the FSCS and even informed us the exact amount of compensation we should expect. How wrong was this?
Therefore I have absolutely no sympathy with advisers caught up in the FSA reviews. It is their own fault they are in this situation.
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Phil Castle | 10 Nov 2009 11:00 am
Bitter Investor - If you read my comments above, you'll see I was not bitching about anything I have to do. In fact I said "the FSAs Structured Product Report was well reserached and well written (end of positive statements) The negative is that there was no looking at the FSAs own failures so that lessons could be learnt about the regulatory failures of the FSA itself"
The FSA in fcat withdrew their consumer guides to high income products completely in April 2008, have not replaced them and are still to provide and explanation for this.
Knowing who the counterparty was prior to the collpase of lehamn's would have made little or no difference to the advice given by most advisers as Lehman's was a-rated until it's complete collapse. The prudent adviser however would make sure they knew who the counterparty was so that if further structured products were arranged they used a different counterparty to spread the risk.
The FSCS issue on your bond sounds like your original adviser may have given you duff information on what the FSCS actually covered, but it's hardly surprising when the FSCS can't work out what it should be covering with regard Keydata and the missing £103 million themselves and the FSA and FSCS seem to have different opinions about who can daclare keydata in default so that FSCS have to take action.
We as a firm would not have used the word "counterparty" when explaining risk of bond issuers failure prior to summer 2008 and the FSA still DO NOT use the term counterparty when talking to consumers as evidenced on searching today their http://www.moneymadeclear.fsa.gov.uk/
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Bitter Investor | 10 Nov 2009 11:42 am
Phil Castle I was not specifically responding to your comment but I was responding to the content of the Moneymarketing article.
In our particular case knowing the counterparty / issuer of the securities would have made a world of difference as we had specifically instructed our IFA that we only wanted a SAFE investment not associated with the American Markets.
Early spring last year it was well know that Lehmans, Bear Stearns and Freddie Mac /Fanny Mae were in trouble.
Lehman in particular were desperatly raising funds to remain solvent.
This is why we did not want association with the American Market.
We were assured that our NDFA Plan was as safe as a building society account.
Guess why we are bitter.
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Phil Castle | 10 Nov 2009 12:25 pm
BI - I suspect based on your comments above you would be highly likely to make a succsseful claim through the FOS against the firm who originally advised you.
I now ntirely understand why you are bitter, you could not have done anymore and it appears the IFA didn't do the homework you asked them to.
Good luck (I don't think you'll need any luck based on how well you have justified your claim above)
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NDFA/KEYDATA VICTIM | 10 Nov 2009 5:01 pm
I cannot believe the arrogance and scant lack of regard or concern for the 6000 or so 'Investors' (Lehmans /NDFA victims) who have so far lost their hard earned money which they thought (were told!) were in 'capital secure' ,'guaranteed return' 'covered by the FSCS' structured 'safe' products pedalled by NDFA and the rest of the structured prod firms. Yes hindsite is great - but had I been given just a small sample of the complete forensic accounting gibberish which tries (and fails) to explain exactly where my £30k was(from the Administrators ) I would have kept it in the BSociety.IFAS were selling these products and seems by most of the IFA commentary they are runnuing for the small print just like NDFA and Keydata. I hope you all get whats coming to you , and are made to repay the money mostly conned out of Victims like me who have lost their savings because in reality you were just looking after yourselves! The very title IFA should be rephrased.You just dont seem to understand the measure of peoples anger - just like the MPs expenses fiasco- the innocent public is there to be exploited with no regard whatsoever for the consequences of your actions -or 'advice' - You should be cleaning up your Industry and supporting the Reg Body so that we (the people that pay your wages!) can get our money back asap, not bitching cause you've been rumbled!
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