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FSA wants firms to stress-test structured products

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The FSA has proposed new guidance for structured product providers after it found weaknesses in the way firms are designing and approving the products.

Between November 2010 and May 2011, the regulator carried out a review of seven major providers of structured products, responsible for about half of the structured products in the UK retail market by volume and value.

It found that weaknesses remain in the way firms are designing and approving structured products, which the FSA says increases risk to consumers.

The FSA’s guidance, published last week, applies to the design of structured products and the after-sales process. It says provi-ders should identify the target market and design products that meet customers’ needs. The regulator says firms still focus too much on commercial factors.

The guidance says firms should stress-test new products to ensure they deliver fair customer outcomes.

This stress-testing should involve testing the products to establish how they would perform under a variety of conditions, including a failure of the firm’s systems.

The FSA says it found that some firms have a “light” product approval process for new tranches of existing structured products but it is sometimes used for products with significant variations. The regulator says firms should have clear criteria for the use of light approval processes.

Firms will also be expected to monitor the progress of a product through its life cycle, which includes making sure there is not a big delay between the submission of redemption requests or valuations and actual red-emption calculations.

The FSA says providers should also consider how they reward in-house salesforces, whether the reward arrangements increase the risk of misselling and whether any risks are adequately controlled. The consultation period for the guidance will end on January 11, 2012.

Bestinvest senior investment adviser Adrian Lowcock says: “Stress-testing new products and ensuring there is a monitoring process in place will help reduce the chances of a misselling scandal but investors need greater transparency on charges and how products are profitable to the businesses running them.”

New guidelines

  • Identify the target market and design products that meet customers’ needs
  • Stress-test new products in a range of scenarios to ensure they deliver fair outcomes
  • Ensure a robust approval process for new products and have clear criteria for the use of a ’light’ approval process
  • Monitor the progress of a product through its life cycle, including post-sale
  • Consider how in-house sales forces are rewarded and whether there is an increased risk of misselling
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