Turner: Low interest rates risk pushing consumers to structured products
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FSA chairman Lord Turner has warned the low interest rate environment is making consumers more vulnerable to the lure of complex structured products.
Speaking at Mansion House last night Turner (pictured) said the last 20 years have been “punctuated with too many waves of misselling” which has pushed total compensation to consumers to over £15bn and the number of complaints to the Financial Ombudsman Service from 30,000 in 2000/01 to 200,000 last year.
He said at the heart of these problems was the complexity of many financial products and a difficulty for consumers to understand the true price of investment products.
Turner said: “So the potential to sell products which carry more cost or risk than customers appreciate is ever-present; and particularly today when low interest rates mean low returns for truly safe investments, making consumers highly vulnerable to the promise of complex structured products which appear to offer the dream combination of higher return without higher risk.”
Turner argued in the move to the new regulatory structure the industry will need to consider the trade-offs that the Financial Conduct Authority will have to make, such as those between more intensive supervision and higher regulatory costs.
He also said there was a trade-off to be made in terms of consumer redress.
He said: “The natural assumption may be that wherever there has been a breach of regulatory rules and also customer detriment, that 100 per cent redress should be available.
“But general principles of law mean that if the breach of rules did not without question cause the whole loss, then 100 per cent redress is not available.”
Turner also said he was wary about the direction of European policymaking on banks’ capital adequacy. He echoed Government concerns that on a national level countries will not have the flexibility they need to tailor rules to suit their market.
He said: “One thing which is crystal clear, but an area of significant concern, is that forthcoming European legislation must allow adequate flexibility for the national variation of macro-prudential tools.
“European capital adequacy regulation should enforce minimum standards across the European Union, but it should leave national authorities free to exceed and vary them above the minimum.
“The idea that securing the single market requires the harmonisation of maximum as well as minimum standards is simply wrong and potentially harmful.”
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Readers' comments (16)
Exasperated Me | 21 Oct 2011 9:26 am
Yes, 20 years of regulation and the numbers keep rising!! What has regulation done for society?
We continue to see so many daft statements coming out of the mouths of the frustrated regulators.
Why bother with EU regulations when this man and his regulatory dogs want to go above and beyond them?
What a complete and utter shambles.
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Anonymous | 21 Oct 2011 9:38 am
Lets see strong action maintained where consumers have been misled, such as with so-called "100% capital protected" ;products - which then failed due to counterparty risk - and not just platitudes and rhetoric from regulators... Otherwise credibility and trust across the financial services industry will never be restored..
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Ken Durkin | 21 Oct 2011 9:52 am
I was always under the impression that structured product providers published brochures that complied with FSA rules and explained all the risks associated with these investments. I was also under the impression that most people could read...
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Richard | 21 Oct 2011 9:55 am
It is a question of balance. I dont and neither do clients find structured products difficult to undersatnd. In a low interest volatile stockmarket enviroment they can be a very beneficial element of an overal investment portfolio.
Problem is where the RDR take us. Simplified advice coupled with headline income yields in a structured product leads to potential miss selling and buying.
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Anonymous | 21 Oct 2011 9:57 am
I do wonder, if the 100% compensation as it's always someone elses fault, mentality ia in danger of actually getting us to the point where some elements of the public ignore the risks of any transaction - as if it all goes wrong they'll just complain and get their money back.
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huw | 21 Oct 2011 10:18 am
Anonymous @ 9.57am
Yes you are getting the picture pretty clearly there. Looking forward to the next PI renewal?
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Anonymous | 21 Oct 2011 10:58 am
Does anyone know what "macro-prudential tools" are???
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Evan Owen | 21 Oct 2011 11:01 am
Why bother with regulation? Let 'consumers' ignore the risk in the knowledge that they can complain later on by claiming they didn't understand the risk... Unfortunately some who have done this to date have discovered that the 'government backed' FSCS, the fund of last resort, doesn't do what they think it says on the tin.
Why bother with PI? It costs a fortune and rarely pays out, might as well stick the money in the FSCS, or an insurance fund as described by Eric Bettelheim.
This has become your prison, and theirs.
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Cassandra | 21 Oct 2011 11:10 am
How many consumers do you think will read Lord Turner's speech?
My guess, near zero.
The report also reveals his concerns over "structured products", and perhaps as importantly his thoughts over the need for more intensive supervision and the costs that may entail.
Why don't we help Lord Turner to communicate with the consumer, do so effectively, and very cheaply, here is my suggestion:
Prepare a simple letter, Lord Turner, post it and make it downloadable on the FSA website, and regulate that anyone advising on structured products has to provide a copy to any potential consumer, and retain a copy signed by the consumer, acknowledging that they have been made fully aware of your concerns for their financial wellbeing..
Won't cost much, in fact I have even drafted a potential example, copied in below. Nah, no charge, let's keep costs down, shall we?
"My name is Adair Turner, I am Chairman of the Financial Services Authority.
I am concerned that in the current low interest environment, consumers may be tempted into considering what are called "structured products" which may appear to offer higher returns but do also carry higher risk.
If you are currently considering such an investment, think very carefully that you fully understand the risks that may be involved."
Or is that all too simple, too straightforward and cost effective?
Imho, Lord Turner, if you are genuinely concerned about such issues, it is long past the time that you found simple, low cost solutions, and yes, communicated these to consumers, and not simply make speeches at grand gatherings to which few, if any, of the public are invited.
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Anonymous | 21 Oct 2011 11:12 am
No sh*t Sherlock! This has only been happening for c. three years. But aren't we only looking at (being potentially judged by) one type of risk in isolation? It was fine when Icesave was paying 7+% (oh but wasn't there a risk too) but if Mrs Miggins needs 5% from her capital to live on then either the appetite for investment risk has to increase or her food appetite decreases so that she doesn't starve. i.e risk not meeting objectives. At least 20 years of regulation at currently £500m per year has only led to 'waves of misselling' - must feel great to have been involved in such a regulatory success, actually I bet it does when you are still on the unaccountable gravy train!
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