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How firms failed regulator’s literature test

Significant deficiencies have been uncovered by the FSA in marketing literature for structured products from several plan managers even after the collapse of Lehman Brothers.

Following the regulator’s review of their promotional material and its subsequent discussions with the firms, three plan managers that packaged and marketed Lehman-backed structured products – NDF Administration, Defined Returns Limited and Arc Capital and Income plc have gone into administration.

The FSA says investors who bought Lehman-backed structured products through these firms may be entitled to compensation through the Financial Services Compensation Scheme.

The FSA reviewed the financial promotions of 56 structured products, 46 of which were produced in the second quarter of 2009. Thirteen were offered between June and September 2008, when Standard & Poor’s downgraded Lehman Brothers, and ultimately when the bank filed for bankruptcy.

It says many of the financial promotions had failings and could have described the key risks more effectively. More promotions named the counterparty and outlined counterparty risk more effectively after the collapse of Lehman but shortcomings remained.

One-third of promotions did not offer a sufficiently clear explanation of the risk of capital loss. The report says: “Some promotions tried to explain the risk of capital loss in terms of ‘protection’ or in a qualified or opaque way.” Some promotions for products where capital was at risk described the risk in terms of “contingent protection” or similarly. The FSA says describing a risk in terms of “protection” or using a double negative can obscure a risk warning.

The FSA found half of the financial promotions assessed were ineffective at explaining the counterparty risk in a fair and accurate manner. The report says promotions often used language that was technically accurate but unlikely to be familiar to consumers. In 80 per cent of cases, the language used in the promotions was generally understandable. Where promotions were unclear, it was usually because the language was overly technical and not sufficiently “consumer-friendly”.

Eighty per cent of promotions gave the credit ratings of the counterparty to help explain the risk but only a handful put this rating in context.
The report says: “It is not for product providers to justify credit-rating systems or particular credit ratings. However, without the context of a rating scale or an explanation about what credit ratings are, some consumers may have misread a rating.”

Legal & General, one of the provider firms exposed to Lehman, says it has not specifically been contacted by the FSA regarding any further updates on its Lehman products since the end of the first quarter. It says it is looking to strengthen the protection on investments.

A spokesman says: “We have followed the FSA guidelines to make sure warnings about capital being protected but not ‘guaranteed’ were very prominent in the literature. They have not come back to us to say they had any specific issues with those plans.

“We know the FSA is reviewing, so it is quite possible that they may come back to us even now with some questions.”

Meteor says the FSA has not raised any concerns over its financial promotions. It says it is always looking to improve product descriptions and will test its wordings against the good practice examples given by the regulator. The company says it will continue to provide generic and product-specific training for IFAs and increase such training. The firm says: “We have always talked to IFAs as part of our product development process and will continue to do so and to provide more background information on the choice of counterparty.”


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  1. rather unfortunate that Cater Allen are advertising their structured product all over the page!!

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