The previous regulator, the FSA, carried out a review of the suitability of advice on structured investment products following the collapse of Lehman Brothers few years ago, and the resulting complaints that were being received from investors by the Financial Ombudsman Service. This was a while ago, but the current regulator’s approach to the sale of structured products is rooted in the findings of this review.
The review focussed on the design, marketing, distribution and advice provided in relation to these products, and considered whether firms had properly understood, monitored and disclosed the risks associated with structured products, including, in particular, the risk to capital and the credit risk. It also considered whether adviser firms had properly assessed the suitability of such products for individual investors and questioned the systems and controls in place within firms to manage and monitor these practices and deal with the potential risks arising out of them.
The review was across 11 firms, and the regulator found instances of unsuitable advice in nine of them. Unsuitable advice was found in almost half all cases reviewed.
The regulator found deficiencies both in the marketing and selling of the structured products that it reviewed, as well as shortcomings in firms' systems and controls and their understanding of the products themselves. The regulator took action to remedy the detriment already suffered by consumers, to ensure that in future investors are treated fairly, and to address issues in the wider struc...
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...ure to explain counterparty risk
Misleading explanation of counterparty risk
Failure to provide information on the product recommended, or providing information on the wrong product
Factually incorrect information in suitability reports
Systems and controls
The regulator’s assessment focused on the three main areas that they considered to have the greatest impact on the provision of suitable advice:
1. Consideration of individual product features and their suitability for different types of customers:
Advisers should consider the features of each structured product and how appropriate they might be for certain groups of clients
Undertake sufficient research over and above the product providers’ marketing literature to determine the risks of specific product features
Where research is done centrally, these assessments should be issued to advisers and the outcomes monitored
Research should seek to identify the underlying counterparties and their financial strength
2, Advisers’ understanding of structure product investments:
Advisers should possess a sound understanding of how structured investment products work, including the key risks, in order to be competent to provide advice on them
3. Compliance monitoring, oversight and management information:
Firms should employ appropriate monitoring and oversight arrangements
Monitoring should focus on the specific risks and not be solely process-based
Firms should have appropriate MI to monitor and review the advice on structured products
