There are two schools of thought on the troubles to hit the structured product market. There are those who reckon that the fuse had long been lit and it was only a matter of time before the sector ran into problems. They point to the precipice bond debacle which saw tens of thousands of investors lose money, several advisers fined and some banned.
They are wary of structured products because they do not believe they are suitable for the masses, particularly to the type of person that might warm to a product that offers a decent rate of growth or income and capital protection. In other words, those investors who are nervous, cautious and a little bit older.
On the other hand, there are those who would argue that the publicity over structured products has been over-egged, unfair and in many ways just unlucky.
For starters, structured product advocates would argue that the demise of Keydata had nothing to do with structured products per se but the shen-anigans behind the scenes and a missing £100m. They would also say that the collapse of Lehman Brothers, an A-rated institution, would have been unthinkable a few years ago and would not have been considered a counterparty risk before the credit crisis came to town.
I would imagine that the three advisory firms that have been called to the FSA’s enforcement division might feel as though they are being charged retrospectively. If Lehman had not collapsed, would they have been hauled over the coals for inappropriate advice and mark-eting literature? I suspect not.
Naturally, the FSA rejects any notion that it is acting after the event. It says that although it instigated the review after Lehman had collapsed, advisers should have been aware of counterparty risk. It said that the majority of cases it examined involved sales made between November 2007 and September 2008 – the credit crunch was well under way and events surrounding Bear Stearns and Rock had already happened.
It says advisers failed to fully and prominently describe the nature of the “guarantee” being provided, investors’ eligibility to access the FSACS and to adeq-uately describe counterparty risk.
“By the time these products became available to retail investors, the issue of counterparty risk was a live one and we would have expected plan managers and advisers to clearly explain this risk to investor,” an FSA spokesman tells me.
Fans of structured products might criticise the FSA for failing to police a sector that was growing at breakneck speed. If the regulator had also been “alive to events” and adapted to changing economic conditions as it expects advisers to do (and says those in the dock failed to do so), then perhaps it would have sent its supervisory teams on a recce earlier.
Those who believe that the post-RDR world lends itself to structured products might be premature. Besides, I am not sure products whose underlying strategies have been dubbed Napoleon, Cliquet, Wedding Cake and Annapurna can be sold “advice-lite”. The FSA says it will be hot on the heels of providers and advisers in the business of selling the plans.
It suggests that advisers might want to review “their approach for advice and sales on structured products”. One alternative is not to recommend them in the first place. It might make the advocates wince but I can see why it might become a popular option.
Paul Farrow is digital personal finance editor at the Telegraph Media Group