FSA orders major structured products review - 3 advice firms face enforcement
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The FSA has announced a review of the wider structured product market and has confirmed that three advice firms face enforcement for giving unsuitable advice relating to Lehman-backed plans.
The regulator says it will be writing to the largest sellers of other structured products asking them to examine how they have sold these products in the past against FSA standards reiterated today and, if necessary, to review past sales and provide investor redress where appropriate as well as change their approach for future advice and sales.
Following its review into Lehman-backed structured products it is referring three advice firms to enforcement for giving unsuitable advice, and instructing other advisers it looked at to review past sales of Lehman-backed structured products and pay redress where appropriate.
The FSA says it found “significant advice failings” on Lehman-backed products in nine of the 11 financial advice firms sampled, as well as serious deficiencies in the marketing literature provided by a number of the plan managers selling these products.
In an update today it says: “The FSA is taking direct action to address the detriment this has caused for investors with Lehman-backed products and robust steps to ensure all future structured products investors are treated fairly.”
The FSA reviewed 157 advised sales across 11 firms and found 73 cases (46 per cent) as unsuitable; 36 cases (23 per cent) as unclear, where it was unable to make a definitive assessment of suitability. This was mainly due to inadequate customer records on file and a lack of clarity as to how recommendations met the customer’s needs, objectives or financial circumstances, says the FSA. Forty eight cases (31 per cent) were cited as suitable.
Key reasons for unsuitable advice were: “the recommendation failed to meet the customer’s needs and circumstances; the recommended product exposed the customer to an inappropriate level of risk including over-concentration of assets in a single product or product type (that is, there was failure to diversify the customer’s assets); and the recommendation failed to meet the customer’s tax needs.”
The FSA says its assessments found that product literature issued by the plan managers formed the core basis of firms’ and advisers’ research on specific products but notes that the failings identified suggest more “fundamental flaws in core principles of investment advice” and are not solely attributable to any deficiencies in the literature.
Yesterday the FSA announced that structured product provider Arc Capital & Income was going into administration following compliance errors made by the firm in June 2008 relating to Lehman product promotional material. Two weeks earlier NDFA and DRL were placed into administration by the regulator as part of its review into Lehman-backed plans.
The regulator has issued all firms that that gave advice to investors on Lehman-backed structured products a template they should use to deal with customer complaints.
It is writing to all remaining investors unaffected by the plan managers’ administration with guidance to help them consider what steps to take including making a complaint if they believe they were misled by product literature or received unsuitable advice.
It will also be publishing guidance to all firms advising on structured products on the standards it expects them to meet and it will undertake follow-up assessments with both these firms and plan managers to ensure they are meeting the necessary standards in 2010.
FSA director of conduct risk Dan Waters says: “This is a hugely complex area given the number of different firms involved, and there is no one-size-fits-all solution for these investors.
“However, given the failings we have come across in the marketing and selling of these products, today we are setting out a package of robust measures to help those who have lost money. We are also taking decisive action to address issues in the wider structured products market to ensure that all future investors will be treated fairly – and we will not hesitate in taking action if firms do not take sufficient steps to respond to our concerns.”
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Readers' comments (24)
mark dampier | 27 Oct 2009 11:22 am
well i'm blowed,there's a surprise!
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Neil F Liversidge | 27 Oct 2009 11:30 am
It would make immensely more sense for the FSA to regulate structured products at the 'manufacturing' end of the process so that they can either be sold with confidence, complete with template risk warnings and explanations, or not at all. It is only possible for advisor firms to take due diligence so far and firms' resources in that regard are minuscule compared with those of the FSA. Sadly the FSA seems to learn nothing from the past. Zero dividend preference shares and the funds that invested in them were truly low risk investments until the magic circle of incestuous investment perverted the whole concept. Had the FSA regulated the likes of BFS to prevent cross-investment between split cap funds then that debacle would never have happened. From the FSA's point of view the positive angle is that regulating products would enable them to employ more staff, which is something that senior civil servants and quangocrats always like to do, because it insulates them further from reality. A larger staff would also increase the pool of people they can fire without endangering their own positions if economies ever have to be made. On the downside of course, regulating products would force the FSA to accept power WITH responsibility rather than without it as they sem to prefer. Now what was that quote about power and harlots....?
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Anonymous | 27 Oct 2009 11:32 am
Are products and the supporting literature licensed, or even scrutinised, by the regulators?
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David Brunning | 27 Oct 2009 11:39 am
The FSA is quite right to take a strong position on Structured Products, examining product creators, distributors and advisors. This is an important asset class - one which should be included in many clients' portfolios - but advisors and clients must have confidence in them before using them on a more widespread basis.
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Anonymous | 27 Oct 2009 11:39 am
Exactly, same old retrospective action. Why can't the FSA regulate in real time.
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Dathan Steele | 27 Oct 2009 11:41 am
Hmm, another 'easy' sale which came back to bite the firms on the bum!
Round and round we go....there is NO magic bullet
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Harris Keillar | 27 Oct 2009 11:51 am
For the FSA to blame IFAs - especially retrospectively - does appear odd, when the FSA should be ensuring that what the manufacturers produce is up to scratch. I would doubt that few but the most conscientious would ever have questioned any large organisation in terms of counter-party risk pre Lehmans' collapse.
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Anonymous | 27 Oct 2009 11:59 am
Northern Rock, Bradford & Bingley, Kaupthing Singer & Friedlander, HBOS, Royal bank of Scotland, Dunfermline B Soc, Keydata, NDFA, ARC income & growth all with one thing in common - Authorised and Regulated by the FSA.
Is it not about time someone established whether the FSA are fit for purpose.
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Dathan Steele | 27 Oct 2009 12:23 pm
Harris, FSA can regulate all they like but if a SP is sold to a cautious investor who should have their money on deposit (up to £50K of course per institution!) then this is simply bad advice, and is, of course, the fault of the IFA or bank salesman.... or the sales manager who pushed his salesforce into flogging these products.
My worry is that these products have been sold as 'can't lose' products to clients who don't have the necessary ATR or Capacity for risk to invest in them, and the 'protected' v 'guaranteed' tags had been glossed over or not explained properly.
If these risks are not properly explained and understood (although Lehman's were an S&P rated 'A' institution....) then the product should not have been sold.
How many clients (or indeed IFAs) actually understand what they are buying, and the risks thereof.....hell, is there any way of assessing the risk of CP failure given all the average IFA on the street has is S&P/Fitch/Moodys ratings and spread rates of the institutions?
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Anonymous | 27 Oct 2009 1:41 pm
If you look at earlier versions of the DRL literature it stated the FSCS covered the counterparty as well. It was only in their very last product that it was spelled out more clearly what this risk was and the FSCS protection covered. If the issuing provider wasn't clear then what hope was there for the client or IFA?
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