The FSA's burgeoning investigation into structured products has seemingly uncovered evidence of inappropriate collaboration between providers and IFAs and stockbrokers. According to the ABI, which has been briefed by the FSA and the Financial Ombudsman Service, the regulators believe that the collaboration was aimed at selling as many products as possible, with scant regard for suitability.
As a result, the FSA plans to visit or send letters to the small number of providers it suspects of involvement.
Some have already been visited but not necessarily for collaboration – the circular also reveals that the regulator is concerned about the advice and practices of tied salesforces and the misdescription in marketing literature of the banks which provided the underlying derivatives.
Given that the FSA and FOS estimate that losses from structured products have reached £1.5bn-£2bn, the consequences of this are likely to be huge. The FSA has already slapped fines totalling £2m on Lloyds TSB and Chase de Vere Financial Solutions for their failures and is set to impose several more.
In fact, the FSA has decided to widen its scrutiny of distributors following its discovery of “various kinds” of poor practice from initial inquiries with around 20 IFA firms and an assessment of FOS complaints.
One of the cited instances of sub-standard behaviour is the use of direct-mailing material in face-to-face client contact in a way that the FSA believes constitutes advice.
According to the ABI, both the FSA and FOS believe this widening of their investigation could result in legal challenges against them and a spate of IFA insolvencies.
Just how serious is this for the industry? According to many industry observers, it could be the straw that breaks the camel's back.
The FSA is still wading through mountains of evidence from its long-running investigation into the splitcapital investment trust deb-acle – its biggest-ever probe – and is yet to publish its conclusions but they are likely to come out this year and the regulator clearly expects the structured product debacle to come to a head.
Chartwell Investment Management director Sue Whitbread says: “There are very strong parallels with splits because of industry collaboration and the question marks over the marketing literature. This has a lot further to go and there will be implications for IFAs across the board.”
Many think that the ages of many of the people who were missold structured products could mean the scandal will eclipse the splits' debacle.
One senior industry source says: “This is bigger than splits because a far greater number of old ladies were conned into putting their money into these so-called safe investments. It is a massive scandal. The industry will emerge from it as a better manufacturer and distributor of products but, as ever, it only learns these lessons at its customers' expense.”
The FSA, however, while conceding that its investigation is likely to drag on, dismisses the suggestion that the scandal is more significant than splits' probe despite noting that the structured product sector amounts to around £5bn and has affected 250,000 people.
FSA spokesman Rob McIvor says: “What is complicating the investigation is the fact that so many of the products were sold on a direct-offer basis. It is not a simple 'Did an adviser mislead a customer' question. It has been building because it is such a big issue but, in terms of the complexity and number of staff involved, it does not hold a candle to the splits' investigation.”
There is certainly a good deal of confusion about where the structured product investigation is headed, particularly among providers. Eurolife, one of the most prolific issuers of structured products, says the contact it has had so far with the FSA has centred purely on IFAs and argues that the regulator is unlikely to unearth evidence of a “magic circle”.
Director Graham Devile says: “I do not think there is a cartel and I do not see how one could operate. An IFA saying that it will do a mailing for a certain number of brochures with our name and address on – that is not inappropriate collaboration. All that we have been asked by the FSA is for specific details on certain IFAs. That is where its focus seems to be.”
Devile also questions the FSA's claim that losses have hit £1.5bn-£2bn. He estimates that only between 10 and 12 issues have really resulted in significant capital losses, with most of the others returning “pretty healthy” amounts of capital.
On that basis, he says, the FSA's figures do not add up. But his main concern is the effect of the negative publicity on structured products generally, pointing out that the FSA effectively absolved Scottish Widows of responsibility when fining Lloyds TSB for misselling the life company's extra income and growth plan.
With the industry waiting for the FSA's final reckoning, what is likely to happen next? What should – but probably will not – happen, according to The Money Portal spokeswoman Kerry Nelson, who has researched extensively on the structured product market, is a collective and public taking of responsibility.
She says: “The industry has a responsibility to provide the right information and to regain the trust of the public. When an issue is highlighted, we take too long to respond. This is the time to put that right, for the industry to take action and push for change.”
With structured products, this is more important than ever. Many victims are elderly and lack resources – they cannot afford to wait for the FSA to come to a conclusion with IFAs already sliding into liquidation. If they have lodged a claim against such a firm, the chances are that the compensation process will become prohibitively complex and drawn out. The industry needs to be seen to be making tangible strides to clean up its act or face its reputation falling even further from grace.