The FSA says there is a risk of absolute return funds being missold as advisers may not fully understand the products.
The regulator published its retail conduct risk outlook paper this week, which sets out what the FSA sees as the most significant risks in the retail investment market over the next 18 months.
The FSA says there is a risk consumers do not understand absolute return funds and believe there is an element of capital protection or guarantee of a positive return. It says consumers may suffer significant loss if they are sold funds that fail to perform.
The FSA says: “Advisers may not fully understand these products, which increases the possibility that poor communication of investment risks contribute to misselling to consumers.”
The FSA is carrying out work to assess the extent of the risk.
Legal & General Investments managing director Simon Ellis says: “The industry needs to find a better way to describe these funds.”