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Turner: Low interest rates risk pushing consumers to structured products


FSA chairman Lord Turner has warned the low interest rate environment is making consumers more vulnerable to the lure of complex structured products.

Speaking at Mansion House last night Turner (pictured) said the last 20 years have been “punctuated with too many waves of misselling” which has pushed total compensation to consumers to over £15bn and the number of complaints to the Financial Ombudsman Service from 30,000 in 2000/01 to 200,000 last year.

He said at the heart of these problems was the complexity of many financial products and a difficulty for consumers to understand the true price of investment products.

Turner said: “So the potential to sell products which carry more cost or risk than customers appreciate is ever-present; and particularly today when low interest rates mean low returns for truly safe investments, making consumers highly vulnerable to the promise of complex structured products  which appear to offer the dream combination of higher return without higher risk.”

Turner argued in the move to the new regulatory structure the industry will need to consider the trade-offs that the Financial Conduct Authority will have to make, such as those between more intensive supervision and higher regulatory costs.

He also said there was a trade-off to be made in terms of consumer redress.

He said: “The natural assumption may be that wherever there has been a breach of regulatory rules and also customer detriment, that 100 per cent redress should be available.

“But general principles of law mean that if the breach of rules did not without question cause the whole loss, then 100 per cent redress is not available.”

Turner also said he was wary about the direction of European policymaking on banks’ capital adequacy. He echoed Government concerns that on a national level countries will not have the flexibility they need to tailor rules to suit their market.

He said: “One thing which is crystal clear, but an area of significant concern, is that forthcoming European legislation must allow adequate flexibility for the national variation of macro-prudential tools.

“European capital adequacy regulation should enforce minimum standards across the European Union, but it should leave national authorities free to exceed and vary them above the minimum.

“The idea that securing the single market requires the harmonisation of maximum as well as minimum standards is simply wrong and  potentially harmful.”


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There are 17 comments at the moment, we would love to hear your opinion too.

  1. Yes, 20 years of regulation and the numbers keep rising!! What has regulation done for society?

    We continue to see so many daft statements coming out of the mouths of the frustrated regulators.

    Why bother with EU regulations when this man and his regulatory dogs want to go above and beyond them?

    What a complete and utter shambles.

  2. Lets see strong action maintained where consumers have been misled, such as with so-called “100% capital protected” ;products – which then failed due to counterparty risk – and not just platitudes and rhetoric from regulators… Otherwise credibility and trust across the financial services industry will never be restored..

  3. I was always under the impression that structured product providers published brochures that complied with FSA rules and explained all the risks associated with these investments. I was also under the impression that most people could read…

  4. It is a question of balance. I dont and neither do clients find structured products difficult to undersatnd. In a low interest volatile stockmarket enviroment they can be a very beneficial element of an overal investment portfolio.

    Problem is where the RDR take us. Simplified advice coupled with headline income yields in a structured product leads to potential miss selling and buying.

  5. Scott Taylor-Barr 21st October 2011 at 9:57 am

    I do wonder, if the 100% compensation as it’s always someone elses fault, mentality ia in danger of actually getting us to the point where some elements of the public ignore the risks of any transaction – as if it all goes wrong they’ll just complain and get their money back.

  6. Anonymous @ 9.57am

    Yes you are getting the picture pretty clearly there. Looking forward to the next PI renewal?

  7. Does anyone know what “macro-prudential tools” are???

  8. Why bother with regulation? Let ‘consumers’ ignore the risk in the knowledge that they can complain later on by claiming they didn’t understand the risk… Unfortunately some who have done this to date have discovered that the ‘government backed’ FSCS, the fund of last resort, doesn’t do what they think it says on the tin.

    Why bother with PI? It costs a fortune and rarely pays out, might as well stick the money in the FSCS, or an insurance fund as described by Eric Bettelheim.

    This has become your prison, and theirs.

  9. How many consumers do you think will read Lord Turner’s speech?

    My guess, near zero.

    The report also reveals his concerns over “structured products”, and perhaps as importantly his thoughts over the need for more intensive supervision and the costs that may entail.

    Why don’t we help Lord Turner to communicate with the consumer, do so effectively, and very cheaply, here is my suggestion:

    Prepare a simple letter, Lord Turner, post it and make it downloadable on the FSA website, and regulate that anyone advising on structured products has to provide a copy to any potential consumer, and retain a copy signed by the consumer, acknowledging that they have been made fully aware of your concerns for their financial wellbeing..

    Won’t cost much, in fact I have even drafted a potential example, copied in below. Nah, no charge, let’s keep costs down, shall we?

    “My name is Adair Turner, I am Chairman of the Financial Services Authority.

    I am concerned that in the current low interest environment, consumers may be tempted into considering what are called “structured products” which may appear to offer higher returns but do also carry higher risk.

    If you are currently considering such an investment, think very carefully that you fully understand the risks that may be involved.”

    Or is that all too simple, too straightforward and cost effective?

    Imho, Lord Turner, if you are genuinely concerned about such issues, it is long past the time that you found simple, low cost solutions, and yes, communicated these to consumers, and not simply make speeches at grand gatherings to which few, if any, of the public are invited.

  10. No sh*t Sherlock! This has only been happening for c. three years. But aren’t we only looking at (being potentially judged by) one type of risk in isolation? It was fine when Icesave was paying 7+% (oh but wasn’t there a risk too) but if Mrs Miggins needs 5% from her capital to live on then either the appetite for investment risk has to increase or her food appetite decreases so that she doesn’t starve. i.e risk not meeting objectives. At least 20 years of regulation at currently £500m per year has only led to ‘waves of misselling’ – must feel great to have been involved in such a regulatory success, actually I bet it does when you are still on the unaccountable gravy train!

  11. Anon 10:58: “Prudential” refers to regulatory action to manage the economy and “macro” is short for macroeconomic, i.e. treating the whole economy as a single entity (as opposed to microeconomics which concerns the workings of individual entities).

    In English, “prudential tools” means “ability to interfere” and “macro” means “wherever we feel like”.

  12. Cassandra should be on every steering committee in financial services.

  13. Really Evan have you taken leave of your senses?
    They would never allow anyone like Cassandra near a steering committee
    She is far too sensible.
    You need a degree in confusieology to get on one of those!
    She would save us all a small fortune mind you, oh sorry that is another reason she is not suitable.

  14. My solution is/was similar to Cassandra’s. Explain things in layman’s terms and provide with a copy of the relevant info from the Moneymade clear website (now MAS), I used to get them to sign the first page of any relevant booklet, before we started recording client meetings. Once we started recording we cut down the number of things clients signed as the spoken word had more meaning.

  15. An interesting article, highlighting the fact that investors are having to take on more risk to be able to make more favourable returns in the current investment climate. The article has a negative slant to just one investment vehicle, when in fact investors are not just looking at structured products for increased potential returns, but looking at a variety of investment vehicles. Many turn to structured products due to the simple, pre-defined nature, where the risks vs rewards as highlighted upfront. The FSA’s guidance surrounding structured products disclosure and documentation has helped the structured product industry really raise its game post 2008 with disclosures and documentation that are frankly far above and beyond what is deemed acceptable by other investment vehicles such as funds and ETF’s. Moreover, the range of products that are typically distributed in the UK retail market now are one of perhaps 6 main types which ensures investors can become more familiar and crucially understand the risk vs rewards with these investments. There are plenty of resources designed to help investors understand the risks and rewards of structured products and now with the recent introduction of the SPGO platform, the UK’s first structured product platform, investors can be supported through the full life cycle of a structured product from finding and investing to monitoring post investment.

  16. Why is it taking the regulator so long to ban this type of product altogether it’s caused so many problems of last 15 years?

    I even ran a campaign against the misleading Chelsea Building Society and Yorkshire Building Society capital protected account and complained to the FSA about the misleading posters. I collected over 100 signatures on a cold January after running a public demonstration outside Ipswich branch of the Chelsea. It still took the regulator three months to ask Building Society to stop putting the posters in the Windows. I suspect if it had been an IFA doing a similar thing then a ton of bricks would have come down on them within 24 hours.

    See below link for further details of how shameful the structured bond industry has become in conning old folk out of their hard earned savings only to give the organisations that offer them a cheap loan.

    Stop talking about protecting customers and ban these misleading products once and for all.

  17. Jamie Smith, Chairman of UK SPA 24th October 2011 at 3:14 pm

    “The UK Structured Products Association fully supports Lord Turner’s priority to ensure that miss-selling of investment products is addressed, and we believe that the association’s efforts are very much in keeping with this view.

    “The association however believes it is incorrect to classify ‘complex’ products as intrinsically unsuitable for retail investors. Many so-called ‘complex structured products’ are actually designed specifically to meet the needs of retail investors.

    “Furthermore, it cannot be assumed that complexity of product equates to a higher risk. This is a misconception held throughout the industry and a theme that the association will address in coming months.

    “We are concerned that the FSA may be overstating the risks associated with structured products. The Financial Ombudsmen Service (FOS) complaints data highlights the small percentage of structured products complaints derived from structured products sales. In the first quarter of 2011, the FOS received only 34 complaints regarding structured capital at risk products out of a total of 81,301 complaints it handled – less than 0.042% of all complaints.”

    “The UK Structured Products Association will continue to seek dialogue with the regulator to ensure customer choice and protection are achieved through a balanced and informed debate. It is vital that intermediaries and sales teams are included in this process to encourage education about investment products, portfolio planning and an understanding about the relationship between risk and reward.”

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