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FSA to issue guidance on structured product terms

The FSA is planning to issue guidance to ensure firms explain to consumers what is meant by terms such as ‘guaranteed’, ‘protected’ and ‘secure’ when they are used in financial promotions.

In its quarterly consultation paper published today, the FSA says it has carried out a review of products which use terms which may be misleading to consumers, including structured products.

The FSA says: “In recent years, to meet demand from risk-averse consumers, the financial services industry has developed a growing and innovative market for products, including structured products, which are often described as ‘guaranteed’, ‘protected’ or ‘secure.’

“We have reviewed this market and concluded that some firms promote these products without any clear and adequate justification for the descriptions used. We believe this could be implicitly misleading and could lead to consumers misunderstanding that is actually offered to them.”

The regulator is proposing to introduce guidance on the use of such terms through the Conduct of Business Sourcebook and the Banking Conduct of Business Sourcebook.

The FSA says this is to ensure firms understand more explicitly what it deems to ‘fair, clear and not misleading.’

Firms will have to make it clear what terms such as guaranteed, protected or secure mean to consumers in financial promotions or product literature.

The FSA adds if it proceeds with these proposal firms will have six months to comply.


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There are 11 comments at the moment, we would love to hear your opinion too.

  1. Missold Investor 6th June 2011 at 1:11 pm

    Something certainly needs to be done. Thousands of inexperienced and risk-averse savers lost their money in structured products around the early part of the millennium (‘precipice bonds’), 1800 of whom with NDFA products for example had to be rescued by FSCS to the tune of £21m. Thousands of similar investors lost their money (£107m) with Lehman-backed products in 2008. The FSA investigated in 2004 and againt in 2009, reporting widespread mis-selling. For whatever reason, ordinary savers have been getting their fingers badly burned and the FSA seems to have done little more than investigate and consult.

  2. …and I guess this is also the end for equity and fixed income funds that are called cautious or balanced.

  3. robert Lundon 6th June 2011 at 2:32 pm

    why have the FSA and OFT allowed companies to use the word guaranteed every item should had a set riskrating set by independent body highlighting its shortfalls until this happens its just a load of words that mean nothing

  4. The key features document of a product should contain this information.

    More effort should be focused on client facing brochures than suitability reports.

  5. @ Harry Moore – I agree with you. In the 90’s, the Key Features Document was short and cocise and listed the key features of the product, whilst the justification report explained justification of the actions taken. Anything extra felt needed went in the product brochure or in appendices in the report so that the consuemr could focus on teh KEY facts.
    How long are KFDs and Suitability reports now?
    Is this in part why the consumer is confused, especially when the spoken word is what the consumer actually RELIES ON at point of sale, NOT the written document.
    All these issues should be explaiend to a consumer and there understanding checked. You CANNOT do that with a pre printed bit of paper. It’s like the difference between watching TV and playing a computer game. One involves interaction to get to the end of the story line and one does NOT.
    If teh FSA really wanted to be serious about qwhat they do for consumers, like stoke brokers and dealers have to record their phone calls and deals, FAs woudl be required to do it to.
    The only problem is that it would prove that it is actually impossible to do everything the FSA require you to in the time the client allows for the meeting.
    How many people have role played client interviews and realised that were we NOT all working to an unrealistic script that both parties know, that the meeting just wuld not be completed in the time allowed/available.

  6. Harry Moore is absolutely right.

    Why does the IFA have to explain what is made evident in a client-facing brochure.

    The problem is that clients don’t read the brochure and they don’t read the 20-page suitability report that we are forced to provide.

    Moreover, much of the terminology is already governed by the regulator. It is the FSA that has determined what ‘protected’, ‘guaranteed’ and other terms actually mean in the first place.

  7. Bob Donaldson 6th June 2011 at 6:47 pm

    The current literature issued by the main players in this market could not be clearer. Try reading 22 pages issued by Fidelity in a KFD this is full of small print and clients get bored after reading the first page.

    The problem is we do not have the rule of Caveat Emptor and it is about time this applied so that if clients confirm they have read the brochure and understood it this is binding on them.

    If I was buying a car and looking for one that did 55 mpg then I would read the brochure to ensure such not just take the salesmans word for it.

    We just keep bombarding them with more paper no wonder they don’t read it.

  8. Alastair Gordon 6th June 2011 at 8:10 pm

    Here we are again. I was at a loss last time when it seemed that nobody at the Equitable or among their many and expensive advisers understood the word “guarantee” so it all had to go to the House of Lords as the Supreme Court then was.

    The language is pretty clear and definitions are available in reputable dictionaries. We do not need more idiotic distortions of language from FSA’s glossary.

    If thes words are used improperly to deceive that is fraud – now so even under English law – so let the perpetrators be sued and prosecuted, not just have a chat with some compliance enforcer.

  9. Lindsay Bateman 7th June 2011 at 11:34 am

    If products are sold under a banner of “100% capital protection”; “guaranteed” , “principal protected” then that is exactly what should be delivered to investors. Banking is based on trust – how can a system work or credibility be nmaintained if these terms are then discarded when the product fails due to unforseen outcomes such as the Lehman’s debacle…

  10. Julian Stevens 7th June 2011 at 8:47 pm

    The bottom line in all this (it seems to me) is the risk of the counterparty failing and that’s the most difficult thing for the average GP IFA to establish. I don’t recommend many structured products but every so often a client tells me they want a product with a capital guarantee and that they don’t mind committing their money for five or six years to get it.

    As members of a large network, we’re generally restricted to a panel of structured products that have been rigorously analysed by the boys in research, but every once in a while I need to call them to ask about a product which (to me) looks sound but which has yet to make it onto the approved panel. The discussions I have with them are very educational. Sometimes they say NO, sometimes they say yes, we just haven’t got round to posting it yet and sometimes they say they aren’t planning to give it carte blanche approval but they’ll do so by application on a case by case basis. They always explain their reasoning which, for me anyway, is very useful and may well have saved me from recommending something that posed an unforeseen risk of falling apart. Then again, they approved a number of Lehman-backed products, so nobody’s infallible.

  11. If a promotional letter and related Plan Brochure says that “Your Capital I only at risk if the FTSE 100 and/or EuroSTOXX 50 fall by 50% over 5 years” then that should be what it means. A miniscule reference to an anonymous ‘strong’ [now called counterparty] off shore company should not provide an escape route for a Plan marketer to insulate itself. The Plan issuer must have known that the big bold statement, and supporting re-worded paragraphs repeating this assertion was untrue. If such language is not, at best, misleading, at worst dishonest, then I don’t know what is.
    As for the posting regarding what a car dealer might say, do I take it that investment salesmen and promoters are viewed as in the same category, and have the same level of reliability as held by the average man in the street?

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