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Lehman delays cast a cloud over structured sector

The FSA’s request for the Financial Ombudsman Service to defer consideration of complaints about Lehman-backed structured products for a further three months is unwelcome news for investors.

In May, the FSA said it was to investigate how Lehman-backed structured products were marketed to clients under its wider implications’ process, with relevant complaints to the FOS suspended pending the investigation. Three months on and the FSA and FOS have agreed for complaints to be deferred for a further three months. The regulator says more work is required.

The FSA must ensure a thorough job is done, with the potential for serious supervisory and regulatory action as a result of the investigation. But investors urgently need to know if it is likely they will get any compensation for potential losses. Equally, the industry needs to know the regulator will be effective in dealing with the matter to ensure consumer confidence is not permanently damaged.

It is understood that at least one institution has begun compensating individuals for losses incurred. Such moves are welcome but should not stop firms being named and shamed where appropriate.

The episode, like many that have occurred as a result of the economic crisis, raises important concerns about the way that some firms conduct themselves. Investors claim the products were marketed as guaranteed investments and they did not have the risks adequately explained to them. Once more, concern over standards of advice has focused on the private banks and the marketing literature used to promote these products.

If one result of the FSA’s work is to reinforce in the minds of consumers the value of independent advice, as opposed to the range of institutions which try to compete with IFAs by using well known brands but inferior service, then that will be a positive.

The FSA’s wider implications’ process also ties in with the regulator’s more general review into structured products and the EU’s work in this area. A top priority for the FSA must be to address the “purported regulatory blockages” stopping providers from naming counter-parties. Clear direction from the FSA is desperately needed here.

The structured product sector still has a large Lehman’s cloud hovering over it. It is up to the FSA to ensure this is removed by getting to the bottom of what went on.


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