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Structural faults

The regulator’s attack could see structured products shunned

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


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There are 2 comments at the moment, we would love to hear your opinion too.

  1. Not recommending them was always popular with me.

    If these things survive they will still be sold ‘off the page’, ‘direct offer letter’ or ‘non-advised sales’ so perhaps RDR will create a great big ‘mis buying’ scandal. Only time will tell and by then it will be too late as per usual, the old laws of regulatory unintended consequences and Muphy’s combined, what a mess.

  2. I fully agree with the sentiment in the artical. FSA regulation is bit like a sledge hammer to crack a nut or closing the gate after the horse has bolted. I have many hundreds of plans with many investors, most of which are still reciveing full maturity proceeds based on the known factors. I have a few unfortunate clients and I stress only a few who have been caught out by Lehmans.

    To ignor the structured product market could be as dangorous as activley advising clients to have them. As part of a oeverall porfolio they are best advice in many circumstances. We could all just stop selling them as see further contraction in the market.

    The main thing is that you should asses your clients aims and needs and if a structured product along with all the pit falls and warnings as appropriate, then you should still advise clients to invest if they are suitable.

    The FSA is just after making headlines as always, making life difficult for advisers and clients alike ,seems to be their aim. Client protection is paramount in my view, however to sit in a crystal tower, with Final Salary pension schemes and large salaries, and plan an ideal world without censorship of their own role, is a dangorous game to play. Maybe a few more heads should roll for letting things get to the collapse of a couple of structured product providers, leading to over legislation.

    Why not let common sense prevail.

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