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Distribution probe over design weaknesses

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The FSA is launching an investigation into the distribution of structured products next year after it identified weaknesses in the design of the products.

Last week, the FSA proposed new guidance for structured product providers after a review of seven providers found weaknesses in the design and after- sales processes.

The FSA warns it plans to conduct more work on structured products, including distribution channels.

It says: “We did not assess sales processes or quality or suitability of individual sales, nor did we include distributors. The FSA will be doing further work on these issues in 2012.”

The regulator says its review found that providers relying on intermediated distribution are higher risk. It says: “Firms that relied on wholly intermediated distribution strategies have a higher risk profile, with additional strain on their systems and controls. These firms accepted only limited responsibility for product distribution and relied on distributors to identify the appropriate target market, with the consequently increased risk of misselling.”

The report urges providers to carry out due diligence on distributors, and conduct monitoring to ensure products are reaching their target market.

The report says firms should act on their assessments and stop using distribution channels if they identify concerns.

Head of conduct supervision Nausicaa Delfas says: “Certain products are not suitable for everyone and providers should assess whether distributors are appropriate to sell the product.”

Chelsea Financial Services head of investment products Matthew Woodbridge says: “Structured products are being targeted unfairly. There are complicated unit trusts that use derivatives and hedging and complex life settlement funds. Why is the FSA not cracking down on those?”

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