The news that at least one major IFA urged the FSA to launch a review of structured products as far back as 2001 has led the industry to question the efficacy of the regulator.
Although the FSA has come under fire before – most notably for its hand-ling of the splits' debacle – IFAs believe the current misselling scandal highlights what they suspect are institutional failings within the FSA's corridors.
The main criticism is the amount of time that the FSA had to act on structured products, given the blizzard of coverage they have generated and, crucially, the warning it had from Kerry Nelson, who was an adviser with IFA Deep Blue in 2001.
Nelson originally wrote to the Treasury, the DTI and the OFT, urging them to insist on clearer risk warnings in marketing literature on the danger of indices, downside gearing and questionable averaging practices. She warned that such literature and providers' positioning of their products was often “woefully misleading”.
Ruth Kelly, who was Treasury Economic Secretary at the time, passed the letter to the FSA, bringing a response from then chairman Sir Howard Davies. In a letter to Nelson, Davies pointed to the FSA's factsheet and consumer alerts and its monitoring of financial promotions as examples of its efforts to protect consumers.
But the letter said that no blanket action would be taken because “we recognise that we must strike an appropriate balance between protecting consumers whilst ensuring we do not stifle innovation and competition across the financial markets”.
But this message did not appear to have reached FSA director of investment firms David Kenmir, who last April wrote to Liberal Democrat MP Norman Lamb pledging to vet structured product ads before they were distributed. At a Treasury select committee hearing later in the year, chief executive John Tiner performed a U-turn, admitting that the plan had been scrapped.
With this idea – which was a favourite with IFAs – a non-starter, what has the FSA done to protect investors?
Its first consumer alert appeared in December 1999 in a document which urged investors to understand the level of risk they were prepared to accept before buying a structured product.
After a factsheet issued in February 2000, the FSA sent out four more consumer alerts between March 2001 and December 2002. However, some of these alerts were simply posted on the FSA's consumer website, with the regulator telling a few journalists about them in the hope that they would rate a mention in their publications. Many IFAs feel this was insufficient.
One says: “If the FSA has done enough, then there would not have been the problems that have occurred. It seems to be working more and more in hindsight. Why didn't it just ring up the IFAs who complained in the papers – which surely the FSA read – to get their advice? Didn't they look at the marketing material?” The IFA believes the regulator should have insisted on product providers putting their plans' best and worst-case scenarios on the front of all marketing material, ensuring that investors knew what to expect. It is a point also made by IFA the David Aaron Partnership, which was heavily involved in the sale of structured products.
Chairman and chief executive David Aaron says: “There was no requirement on providers to call their products high-risk. The FSA should have guided them about putting warnings on the front of the literature. If they had, none of this would have happened. Even our clients make this point to us.”
Some IFAs go further, suggesting that the FSA should have stepped in to stop the sale of products they believe were flawed. The most obvious example is the Scottish Widows' extra income and growth plan that Lloyds TSB was fined £1.9m last year for misselling to over 20,000 branch customers.
Alan Steel Asset Management consultant Alan Adam says: “The Widows' product – and the Scottish Mutual one that was also linked to a basket of shares – was fundamentally flawed and should not have been allowed to get past the design stage. The FSA never defuses things in time.”
Some IFAs believe that one of the major problems with the Widows' plan – which filtered down to subsequent products – was the brevity of its investment period. Most plans issued in the mid-1990s had five-year investment horizons but by the late 1990s this had often dropped to three, which IFAs believe is too short a timeframe for most investors.
Hargreaves Lansdown head of research Mark Dampier says: “Three years is less than the minimum period for proper investing. Isn't this contrary to what investors should be told? If I recommended investing for three years I would probably get in trouble.”
As most structured products were sold without advice, IFAs had little chance of warning investors to steer clear of the riskier plans. The choice was often made simply on the strength of what was often inadequate marketing material.
But some IFAs are culpable. The FSA recently fined Chase de Vere £165,000 for misleading direct-offer promotion. In December, the FSA sent IFAs a questionnaire – which they had 24 hours to return – asking them about their ability to meet potential misselling claims.
Whether this was a bid, as some IFAs believe, to establish the potential impact on the Financial Services Compensation Scheme is open to question. The FSA simply says it was following up on earlier enquiries.
But experts say there seems little doubt that the FSA failed to recognise the dangers in time. If it had, would it have needed to hit firms with massive fines, with more expected this year? They conclude that the regulator needs to be more proactive, nipping problems in the bud before they grow into scandals the industry can ill afford.