The FSA is mulling increased regulation on exchange-traded products, warning certain ETPs are complex and risky, says David Bower at iShares.
The regulator expressed concerns over the soaring popularity of ETPs among retail investors and the increasing complexity of certain products in its Retail Conduct Risk Outlook report published in February.
iShares' head of European marketing Bower says: "I think the case the FSA is pushing here is based around ETCs and ETNs, looking at an argument to regulate the structures and exposures being delivered within them."
The paper cites ETNs, ETCs, leveraged, inverse and active ETFs as among those "complex ETFs" that might threaten unsophisticated investors.
Bower says: "What they are really hitting on is that the qualities of an ETF are being misinterpreted in respect of other exchange-traded instruments."
The FSA warns that ETNs and ETCs can be marketed and perceived by investors as being equivalent to ETFs.
Bower agrees: "Just because the first two letters, ‘exchange-traded', are the same, people automatically infer similarities between the acronyms."
He highlights the report's division of physical and synthetic replication, which notes that swap transactions introduce additional counterparty risk for the end customer.
Bower argues Ucits-regulated ETFs comply with strict counterparty limits, guaranteeing a certain amount of inbuilt investor protection. "But that is not necessarily carried through the regulatory framework that governs all exchange-traded structures. The FSA is absolutely right to be making the distinction."
iShares launched two ETFs tracking Russia and India based on the multi-swap counterparty model, last September.
The FSA's latest comment on the ETF industry appears to show the regulator backing away from its previous enthusiasm for the product.
However Bower defends the review, arguing the FSA is keeping pace with an industry that is expanding at an exponential rate, but says the issue of terminology is not a new one.
"During the consultation paper at the end of 2009, we specifically went back to the FSA to call out a need for clarity on structures.
"One thing I would say is there's much more fluidity in quality around ETNs and ETCs, because a lot more is left to the discretion of the manufacturer. When it comes to making a fund, the regulatory framework is much tighter."
Bower welcomes the FSA's attention as a sign of an industry that is seeing rapid growth and development. He adds: "I would be concerned if investors interpret the interest in a negative way, of course, but I am not sure they will, because the experience people have had in the ETF space over the last 10 years has been wholly positive."
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