While it chose not to join the regulators of France, Spain, Italy, Belgium and Greece when they introduced their short-selling ban – a knee-jerk reaction if ever there was one – it has still been looking over the shoulder of structured products and exchange-traded funds.
However, on occasions such as this the FSA tends to single out types of product rather than needs of investor and associates “clear, fair and not misleading” information with anything that isn’t long only.
The complexities behind the products at the heart of Northern Rock’s demise in 2007 and Lehman Brothers’ collapse at the end of 2008 spooked the rating agencies and the central banks as well as the regulators. Since then, they seem to have had a bee in their bonnet about structured products (thanks to Keydata ) and ETFs as they have gone down the synthetic/swap-based structure.
Their attention should simply be on making all products to be “clear, fair and not misleading” rather than singling out particular types of product that, simply by doing so, makes investors even more wary of them unnecessarily.
On behalf of structured products, James Harrington, chairman of the UK Structured Products Association, says: “We are concerned that the FSA may be overstating the risks associated with structured products and understating the risks associated with other investment types.”
He added: “However, there is a misconception among the investment community that the complexity of a product determines the risk of the product. While it is important that investors can access investments that are in line with their risk profile, it should not be assumed that complexity equates to higher risk.
“It does not follow that a product with a relatively complex structure will also have a complex risk versus reward profile, or vice versa. As a result, it should not be assumed that complexity of a product equates to higher risk or to narrower suitability/appropriateness.”
At our recent Portfolio Adviser ETF roundtable, (see September’s issue), the debate quickly moved to counterparty risk and the fact that absolute return funds, with billions of pounds under management, “have every single counterparty and risk known to mankind that is not properly disclosed to investors and the transparency is very poor.”
You can see why the ETF providers, as Harrington does, feel singled out.
As with the IMA sector debate, the discussion needs to move away from being ‘input-based’, all about product design and structure, to being ‘outcome-based’ and ensuring that investors have the right information to assess any risks/rewards from a future investment.
