It was therefore apt that the FSA should announce it is reviewing the ‘purported regulatory blockages’ stopping investors and advisers identifying the underlying counterparty of certain structured products.
At an annual structured retail products conference last week, retail policy director Dan Waters said the FSA had been considering the quality of marketing material and risk disclosures issued following Lehman’s failure and was working to ensure the prominent indication of relevant risk in financial promotions.
He expressed concern about the range of structures in the UK market and said the FSA was considering further elaboration of the application of criteria which determines whether products can be sold on a non-advised basis as well as analysis of key elements of the prospectus directive.
Chelsea Financial Services head of investment products Matthew Woodbridge says: “I think this implies there is going to be a bit of a shake-up, a bit of streamlining perhaps or at least clarification for investors and advisers going forwards. It is saying things are too disparate with too many bits and pieces for what are seemingly the same products.”
Lowes Financial Management managing director Ian Lowes says greater transparency would move the industry to where it should be. He says: “If advisers are recommending structured products without the requisite knowledge they’re not doing themselves, the industry or their clients any service. A lot of the criticism is about bank sales and this is where the watch needs to be but in Europe that’s where most of the sales are.”
According to Lowes, the industry has responded to the UK’s complex tax system with product innovation and attempting to create one structure would not be viable. He said: “There are a vast array of structures to match the vast array of different taxes in the UK that a client should suffer on those returns and there is no catch all. To say there should be one structure is slightly blinkered.”
In his speech, Waters alludes to the popularity of structured products in the European retail market where the bulk of sales are made on a non advised basis. With much of the legislation being driven by EU pressures, many advisers question whether the FSA will be able to tighten distribution through banks when countries such as Spain, Germany France continue to thrive on sales in this market.
Helm Godfey managing director Bruce Wilson says: “This is what the FSA does all the time, it squares the circle but sometimes you cannot square things and it’s going to be a real problem. Without advice this market is going to be hugely problematic and banks will keep on pushing products which in some cases will work and in others won’t.”
Wilson believes the more transparency surrounding counterparty identification the better but says a possible solution may be to formally regulate structured products thereby placing the onus on the originating banks.
He says: “The answer is possibly to regulate the product as it is the toxicity of the product which usually causes the problem. If it becomes a regulated product you know the problem lies with the producer of the product- the bank- if something goes wrong.”
In 2003, the FSA produced a factsheet on capital-at-risk products to help consumers put Scarps into context with other capital-at-risk products. Under its old conduct of business, the FSA’s scarp requirements obliged structured product providers to include this factsheet with any direct offer mailings to ensure consumers received the necessary generic information on risks.
According to a spokesman for the regulator the EU-led implementation of MiFID in November 2007 brought in “less prescriptive, more principal based rules” meaning that the distribution of the factsheet ceased to be a requirement.
If as Waters suggests, the issue comes down to a lack of consumer knowledge of capital guarantees in structured products, was it prudent for the UK regulator to withdraw the factsheet requirement which outlined some of these risks?
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