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Banks get battering as FSA orders structured review

Hargreaves Lansdown chief executive Peter Hargreaves has led industry experts in slamming banks for their role in the structured product debacle.

Hargreaves says the FSA’s decision to announce a major review of structured products is a disaster for financial services and he highlights banks as the biggest seller. He says: “They have shovelled these products since the market collapsed in 2000 and between them and the IFAs the cost must go into the billions. How can products be marketed under the guaranteed or protected income banner when they clearly are not? The products should be banned.”

exus IFA director Kerry Nelson says: “I have seen some horror stories about IFAs and people have to take responsibility for that advice but the biggest culprits in terms of volume, both monetary and for cases, are going to be the banks.

“I think that people did not understand the nature and risk of these products because there are so many different facets to them, that is why they have always been complex and perhaps why they should never have been sold en masse as they have.”

Baronworth Investments director Colin Jackson says the banks’ “over the counter” approach to structured product sales is dangerous. He says: “I think they are probably at risk because you hear about members of staff flogging things to customers when they do not know what they are talking about.”

A Barclays spokeswoman says: “Barclays has always been very careful in its selection of partners for its structured investments business and all our UK products for retail banking customers are backed by Barclays Bank plc.”

A number of banks, including Lloyds Private Banking, sold products backed by Lehmans. A Lloyds spokesman refused to comment.


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There are 17 comments at the moment, we would love to hear your opinion too.

  1. Why is it we have to pass exams and gain qualificatiosn when banks can let any Tom, Dick or Mary loose selling financial products. If the employee leaves there is no recourse against them but we are held liable!
    I worked for some time for a firm who did service works for banks and on the back of Cash Room doors were Sales Target Charts for all the staff to show how many Mortgages, Insurances etc they had to sell in a month. The staff have no alternative but to hawk their wares to customers or else they were paid off.

    I hope the banks get their comeuppance when this is reviewed but I suspect the cosy little cartel with the Financial Authorities will sweep it under the carpet as they wont want to be held responsible for their actions and lack of supervision.

  2. I fully agree with Peter Hargreaves. My firm has avoided selling structured products due to their complexity and the fact that no matter how they might be marketed by the providers they are not “guaranteeed”.

    Providers can produce reams of “how this product would have performed over the past 5 years”, but I have been in the industry long enough to know that market conditions constantly change.

    The sad thing about all of this is my firm and other well run firms will pick up the cost of failed structured products via increased PI premiums and increased FSCS levies. Their must be a review of how the FSCS is funded.Surely a levy per policy,with higher risk products carrying a higher levy is worth considering.

  3. Hmm, would that be the same LLoyds that was hammered for SCARP misselling a number of years ago?

    This from a 2004 article:

    ‘The UK Financial Services Authority (FSA) is set to finalise tough new guidelines for marketing retail structured products this month, as it moves to strengthen oversight after 2003’s ‘precipice’ bond controversy, which saw Lloyds TSB fined almost £2 million for mis-selling.’

    Plus ça change (plus c’est la même chose) ?

  4. It is not just these products that need review, banks have been so huge that the FSA have been afraid of them. We the public do not want our tax money returned by the banks it would be better now that things are on the up to sell OUR share to new entrants without all the baggage of the present banks

  5. I remember a period in the early 90’s when the underlying ‘assets’ for almost every structured product (precipice bond type at that time) was in fact Midland Bank as it was at that time, irrespective of the headlined ‘provider’. Diversification? In fact they cornered the market because they had mispriced their offer. The actuary concerned was sacked, Midland merged in to HSBC and potentially very heavy losses were avoided courtsey of the late 90’s bull market. How can any IFA check the pricing calculation, that the margin (clue, normally very high) which the provider is taking is reasonable (in both cases they simply don’t/won’t provide the necessary information), as well as reach an independent view of the solvency of the guarantor – which would require and indepth understanding of the whole of their liabilities – when the ‘professionals’ in this field, the rating agencies and the regulators both completely failed? These are toxic products designed to deceive by make risky products look safe and meantime pay a very high reward to the provider. They should be banned.

  6. If these products have been so obviously unsafe and unsuitable why haven’t the FSA stepped in long ago and stopped sales of them.

  7. Another amusing RDR snippet is that Advisers will potentially have to consider other products as well as the current commonly sold products such as bonds and Oeics.

    So this will include IT’s, SP’s, ETF’s and the whole weird and wonderful world of Unregulated collectives….

    I saw an ad the other day for a dog warden….. sounds like fun, at least the creatures with teeth come at you from the front, and you have a net!

  8. Anyone with any intelligence would not recommend these complex products unless the investor is savvy too and if they were…. Yet again the regulator has failed to regulate them properly and looks at it afterwards (no doubt at great cost to companies like ours that do not recommend them). The FSA has proved yet agin it is not fit for purpose.

  9. What a load of garbage in nearly every aspect of every comment made, by all concerned.

    Sensibly used, good quality structured products can add value for investors, in blanced portfolio advice. FACT.

    Poor quality structured products, used by poor quality advisers, and therefore invested in by ill-informed investors equals a recipe for disaster : but the advice is just as much at fault as the bad structured products are.

    The FSA review has brought this FACT to the fore as much as anything about structured products themselves.

    IN FACT, key areas of advice highlighted by the FSA as representative of bad advice relating to structured products have nothing whatsoever to do with structured products. For instance lack of portfolio diversification and advice relating to tax. The advice would have been considered bad regardless of the product used, ie it could just as easily have been a mutial fund or a tracker. No doubt if a thematic review of advice was or had been undertaken it would be advice and advisers per se that would be in the spotlight.

    And the good advisers would stand apart from the crowd just as the good structured product providers and producs can and do : albeit that everyone can benefit from points highlighted and respond positively to them, in the interests of investors receiving and benefitting from better providers, products and advisers/advice.

    Nothwithstanding the detailed examination of structured products, that highilights that the FSA has a better understanding of the industry, the products, their features, and their role and value in investment portfollio, than the commentators in this article and the blog response, it should be remembered that RDR also makes it clear that independent advisers will need to use structured products when appropriate, and that they must have the pre-requisite knowledge to do so, if they want to call themselves independent advisers.

    The SP industry will undoubtedly need to address all of the issues raised by the FSA, immediately : and the line in the sand is the day that their findings, guidance and statements of requirements and expectations have been made, ie Tuesday 27 October, ie improvements will be expected forthwith.

    BUT, equally, advisers will need to respond accordingly and demonstrate that they have the knowledge and skills to advise clients properly. This means knowing about structured products, avoding the worst ones, as they do with mutual funds, and utilising the minority of good ones, as they do with mutual funds.

    PI insurers will need to demonstrate that they know and understand the dynamics of the industry that they insure, so that they don’t obstruct the client-centric improvements in products and advice that teh FSA is trying to bring about.

  10. To anon (I wish fewer people posted anon, especially when there is no apparant reason for you to do so). This is from the FSA paper 07/11 responsibilties of providers and distributors….
    Distributor responsibilities
    1.22 In the area of financial promotions, Principles 3, 6 and 7 are particularly
    relevant. In particular, a firm:
    (1) should have in place systems and controls to manage effectively the risks
    posed by financial promotions;
    (2) in passing on a promotion created by a provider, must act with due skill, care
    and diligence. A firm will not contravene the financial promotions rules
    where it communicates a promotion produced by another person provided the
    firm takes reasonable care to establish that another firm has confirmed
    compliance with the relevant detailed rules, amongst other matters (Note (16)).

  11. Ok Anon

    Demonstrate to me how you identify a ‘good quality’ SP, and how you can demonstrate it to the client and the FSA. I’m not just talking about the ‘quality’ of the CP, but also the viability of the SP provider, who, let’s face it have no ‘financial strength’ of their own. Name some??

    Ah, so a ‘balanced portfolio’ needs SP exposure does it? interesting, and IMHO total tosh!

    Have a look at what some of the DFM’s have been doing around the use of SP’s and there is some interesting and scary things going on….

  12. Ironically just before the proverbial hit the fan, AVIVA (I do keep thinking of buses when I hear that name) launched ther “defined returns fund” which is a strcutured product (growth only) which has three different counterparties, but has “colateral” deposited in case of counterparty failure.
    The question is, whether this is a cost effective way forward for the structured product market or whetehr a client mut just as well buy the assets being bought as collateral directly?
    Thoughts please…..

  13. Phil

    I did not review that AVIVA product, but I have reviewed a product which used collateral in the form of AAA Government bonds. It looked like it was a safer option, however it did not pay headline grabbing rates for some reason! A SP provider once told me that designing a product which uses Gilts or similar as collateral was not worth them doing, as IFAs would not invest in it as the returns it would have delivered were a lot lower than the other products available on the market using dodgy US investment banks underpinned by TARP…..

  14. Dathan – You’ve picked up on what I was trying to hint at. I always say to clients guarantees costs money and the moment you mention the word guarantee, be prepared for the cost. The FSCS is a cost and one has to wonder which would be more appropriate, 1. Structured products to be structured in a way to have FSCS cover on the majrotiy of the sum invested. 2 Collateral backing using Gilts 3. Clear explanation of counterparty risk and not too much backed by any one counterparty in a clients portfolio 4 Simply use a managed fund….

  15. But does the managed product offer any guarantee if the markets start to fail? as structured products generally offer some form of protection making them more suitable for a more cautious client than those who would normally invest in a managed fund. As has been said previously structured products have there place provided they are used for a suitable client bank.

  16. Anon – I have an open mind with structured products, but can’t work out why you are posting anon?
    Any guarantee comes at a price, just as opting for not having a guarantee has a potential cost.

  17. I have 27 years experience in this industry and am a Chartered Financial Planner. A mentor of mine once told me that ‘if you don’t understand how a product works then don’t advise on them as it will invalidate your PI’. I have never been able to understand or get to the bottom of how these products work, and for those who think they know try asking a provider the finer details,. Consequently we won’t advise on them.
    Unfortunately I have come across too many advisers in the country who still think about ‘flogging product ‘and in difficult market conditions these look like an easy sell. No doubt we will all pay the price in terms of higher PI costs, loss of public credibility for those who really just don’t know any better flogging this toxic garbage.
    And for all those supporters of SP’s who every time think they have found the magic bullet…just remember there isn’t one.

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