A review carried out by the regulator between November 2010 and May 2011 assessed seven major providers, between them accounting for around half of structured products in the UK retail market by volume and value.
It found that while there had been some improvements, “weaknesses remain in the way firms are designing and approving structured products – increasing the risk to consumers”.
In its guidelines, which are open for consultation until 11 January, 2012, the FSA says providers should identify the target audience and then design products that meet that audience’s needs. They should pre-test new products to ensure they are capable of delivering fair outcomes for the target audience; ensure a robust product approval process is in place for new products; and monitor the progress of a product throughout its life cycle.
Nausicaa Delfas, the FSA’s head of conduct supervision, stressed the regulator is concerned that increasing product complexity is placing a strain on firms’ systems and controls.
Mis-selling risk
“A lack of robustness in a firms’ product development and marketing processes can increase the risk of poorly-designed products and lead to mis-selling,” she said.
“Many of the problems we found with the product design process were rooted in the fact that the firms are focusing too much on their own commercial interests rather than the outcomes they are delivering to consumers. Where we found problems we have taken action with the firms involved.”
Clive Moore, partner at Protean Investments, welcomed the FSA’s involvement to “prevent the greed-driven excesses of the past”, and especially given the increasing popularity of structured products in the retail market.
He said: “It is always good to see the FSA focussing on customer need, and although most structured product providers do take very seriously the needs of investors, there have been one or two who have not got past the idea of a high headline rate to attract the greedy, even if the cost of this is a link to a basket of individual stocks, the risk of which it is incredibly difficult to assess – certainly beyond most investors or advisers.
“Overall though, there have been a lot of very positive product developments to meet customer need – including products that deliver growth in times when markets continue to disappoint, links to inflation to deliver real-term protection for capital and a consistent effort to deliver products that can be understood easily by investor and adviser alike.”
