The FCA has raised concerns about the conduct of firms in the structured product market following a thematic review of the sector.
The regulator says its review highlighted a number of areas where some firms were falling short of expected standards.
It says some firms failed to define a clear target market for their products at the design stage, to conduct sufficiently robust analysis and stress-testing, and to properly assess whether products are likely to represent value for money for customers.
It also found some firms failed to monitor how the product was distributed to check distributors had sufficient information about the product and its target market to fulfil their own obligations to the customer.
The FCA says: “We are concerned that the product governance approaches of some firms in this market are not meeting our expectations and there is a risk that flawed product design could result in poor consumer outcomes.”
The regulator has asked some firms in the review to carry out further work to determine whether any of the issues identified may have affected customers.
The regulator says this could result in redress for customers and the use of other regulatory tools.
It has also published a behavioural economics research paper, which shows many consumers overestimate the expected returns on structured deposits.
Consumers were asked to anticipate how the FTSE 100 would grow over time and then for their expectations for structured deposits linked to the FTSE 100 during the same period.
While consumers’ expectations for FTSE growth were correct, they did not match the returns they anticipated on structured products.
The FCA found that returns were “significantly” overestimated, by an average of 10 per cent of the investment over five years.
The FCA also found that consumers did not recognise that the structured products designed for the purpose of the research were unlikely to offer greater returns compared to best-buy fixed-term cash deposits.
The regulator says the research findings reinforce the importance of firms designing structured products that are a reasonable match for the financial sophistication of customers in the target market.
FCA director of supervision and authorisations Tracey McDermott says: “There is a place for structured deposits in the market. But our research shows that many consumers find it difficult to understand how these work and compare them to alternatives.
”That is why it is crucial that firms ensure the way they design and market these products is driven by the needs of consumers. Our work indicated that this is not always the case.”