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FSA structured product review to look at unnamed counterparties

The FSA has pledged to investigate the ‘purported regulatory blockages’ stopping investors and advisers identifying the underlying counterparty of certain structured products.

Speaking at an annual structured retail products conference last week, retail policy director Dan Waters told delegates consumers may not be fully aware that capital guarantees in strucutured products are only as strong as the guarantee provider and said that the FSA is working to ensure the prominent indication of relevant risk in financial promotions.

He said: “In the UK, in addition to collecting data on products affected by Lehmans’ failure, we have been considering the quality of marketing material and risk disclosures in communications issued for the products affected.

“Our analysis has thrown up a number of issues but, in particular, we would highlight that we are keen to work through some of the purported regulatory blockages that stop investors or their advisers knowing which institution or institutions have issued the debt that makes up the capital protected element of a particular product.”

Structured product providers such as NDFA say they are unable to openly disclose the counterparty name due to EU prospectus directive constraints until after a plan’s strike date but can tell advisers who contact them individually.

Waters told delegates any material containing risk warnings should not
simply duplicate warnings used in earlier promotions, such as earlier
‘tranches’ of a product, without reassessing current risks and market conditions.

He said the regulator was concerned about the range of structures and
forms available in the UK market and highlighted that the CESR taskforce is
in the process of considering how structured products should be distributed
and sold to retail investors across Europe.

In its report, the taskforce recommends that there be a further elaboration
of the application of criteria which determine whether products are
non-complex and can be sold on a truly non-advised basis as well as analysis of certain key elements of the prospectus directive.

He said: “For certain types of wrapper, we think that it is not altogether
clear that firms’ interpretations of how Mifid, the prospectus directive and
the relevant applicable disclosure requirements interact, serve in a manner
that is conducive to the optimal protection of the interests of retail
investors.”

Waters said some in the industry wanted structured deposits to have a comparable advised sales regime to other structured investments due to their “tendency to opacity, their frequent use of off-shore subsidiaries or sister companies, and diminished information disclosure requirements in comparison to investment products”.

He said any change to the rules would be a question for the Treasury and highlighted the work of CESR and the European Commission would be an important driver of any change.

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