FSA chairman Lord Turner has warned that low interest rates are making consumers more vulnerable to the lure of complex structured products.
In a City banquet speech at Mansion House last week, Turner said the last 20 years have been “punctuated with too many waves of misselling”. He said this has pushed total consumer compensation 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 is the complexity of many financial products and a difficulty for people to understand the true price of investment products.
Turner said: “The potential to sell products which carry more cost or risk than customers appreciate is ever present, 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.”
Lowes Financial Management managing director Ian Lowes concedes that while some banks do offer complex, poor-value structured products, the investments are not generally sold as low-risk products.
He says: “The low interest rate environment is bound to make some people consider more risky investments because more risk usually means greater potential return. But to suggest that structured products might appear to offer ’a dream combination of higher return without higher risk’, as referred to by Turner, is wrong. There are risks and they are clearly stated, if not overstated.”
Turner argued that 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 is 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.”