Structured product providers face additional compliance costs

Structured product providers are facing additional costs as a result of the FSA’s new guidance on structured products.

The guidance, published today, says structured product providers must identify their target market and design products that meet those customers’ needs, pre-test new products to ensure they deliver fair customer outcomes and ensure a robust new product approval process. Firms will also be expected to monitor the progress of a product through its life cycle.

The FSA’s cost benefit analysis estimates that the cost for firms to embed treating customers fairly principles in product development, including the ongoing costs for more consumer testing, will reach around £40,000 per firm on average.

The regulator says the ongoing cost to firms of structured product stress-testing and modelling will be approximately £1,200 per product.

For firms that need to improve their governance arrangements to meet the guidance, the one-off cost of reviewing strategy is expected to cost £150,000 per firm, while the ongoing costs of more senior management reviews of outcomes is estimated to cost £20,000 per firm. The FSA says these particular costs are likely to be overestimates since they are based on reviewing all retail investment products, not just structured products.

The FSA estimates the ongoing costs for firms to adapt management information reporting will be £20,000 per firm. Any increased training for distributors that this practice could necessitate is expected to add ongoing costs of £10,000 per firm.

The requirement for firms to exercise care for linked sales is likely to apply only to products sold by banks’ tied financial advisers. The monitoring costs for bancassurers is estimated to be approximately £5,000 per firm on average.

The FSA says that many improvements needed to comply with the guidance are likely to be achievable via a re-distribution of firms’ resources as opposed to new resources.

The FSA says it does not think the costs are large enough to cause a detrimental impact on competition or have a significant impact on sales volumes, despite narrow target markets.