The FSA says absolute return funds pose a misselling risk as advisers may not have a proper understanding of the products.
The regulator’s latest Retail Conduct Risk Outlook paper, published today, says consumers may not understand the complexities of absolute return funds and may believe there is an element of capital protection, or guarantee of a positive return.
It adds that complex strategies and structures used in absolute return funds “raise questions about their suitability for all types of retail investors”.
The FSA says: “Financial 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 currently undertaking work to assess the extent of the risk posed by the funds.
It also reiterated its scrutiny of exchange-traded products, which have a “wide range of structures with some investing in riskier and more exotic markets”.
The FSA says: “Consumers or their advisers may not fully understand ETPs and consumers may therefore suffer detriment if they are sold a product unsuitable to their risk appetite.”
Over the last 18 months the FSA has conducted thematic visits to a number of firms who account for a significant portion of the EU exchange-traded product market.
It found some evidence of poor practice in UK-authorised firms and has asked firms to address the risks found.
The FSA says: “We are working closely and effectively with the Financial Policy Committee and other EU regulators, to mitigate risks where we are not the lead regulator. Some issues require a coordinated response from the EU. This work is ongoing.”