The regulator stressed that structured product firms’ senior management must “do more to put customers at the forefront of their approach to product governance,” including identifying a clear target market during product design.
There was also a warning that products should have a reasonable prospect of delivering economic value, and that firms need to provide clear and balanced information on its risks.
It also asserted that firms need to strengthen the lifecycle monitoring of products, i.e. ensuring distributors have enough information to sell them appropriately and that they are being distributed to an identified target market.
In its latest behavioural economics research paper, published today, the regulator asked consumers to anticipate how the FTSE 100 would grow over time and then for their expectations for structured funds linked to the index. On average, returns were overestimated by almost 10% of the assumed investment amount over five years.
Tracey McDermott, director of supervision and authorisations at the FCA, said: “There is a place for structured deposits in the market. But our research shows that many consumers find it difficult to understand how these work and compare them to alternatives. That is why it is crucial that firms ensure the way they design and market these products is driven by the needs of consumers. Our work indicated that this is not always the case.
“For consumers, the message is simple – think very carefully before buying a product if you don’t understand how it works and if you’re unsure, ask for more information or consider seeking financial advice.”
While the FCA believes that the current regulatory regime is clear, it has said that if on-going supervision of this market does not show firms responding to its findings further regulatory action will be considered.
“This review is broadly positive with regard to distribution of capital protected structured products, admittedly a pretty small market these days, but nevertheless one that still attracts some customers in the continued interest-rate drought that the government has inflicted upon savers,” commented Clive Moore, managing director at IDAD.
“Product providers can never be reminded too often to ensure the products they design are suitable for the target market and this review is a good reminder that they should pay attention – it also reminds investment banks that they too have to consider the investor at the end of a (sometimes very long) distribution chain.”
