A lack of understanding of commodity markets among financial advisers could lead to investors buying unsuitable products, the FSA has warned.
In its paper, entitled ‘Growth in Commodity Investment: risks and challenges posed for commodity market participants’, the regulator says the main danger comes from firms developing products for retail investors without sufficient knowledge of the sector.
A shortage of financial services professionals who understand commodity markets was also cited as a potential issue and could, it says, result in consumers buying products they don’t fully understand.
The regulator says the recent growth in commodity markets with record prices, high volatility, and the high returns to be gained have attracted a wave of new investors and firms into what was previously viewed as a specialist market.
The level of funds being invested is also expected to grow and, unlike previous cycles, to remain.
Hector Sants, FSA managing director for wholesale business, said: “The growth in the level of investment in commodity markets, the development of new products and a changing use base has combined to create a greatly changed environment in the commodities markets over the last few years.
“This has given rise to a number of risks and challenges for both established and newly arrived participants.”
The regulator outlines a number of other factors it wants advisers to consider when dealing with the commodities markets.
As well as the regular warnings, such as being aware of, and prepared for, market abuse, the FSA says the pool of experienced staff with commodity market experience is limited and that increased investment in commodities could overwhelm the trading system infrastructure.
The regulator also says increased volatility raises the risk of failure and recommends firms ensure they have adequate risk management systems and procedures in place.
Sants adds: “The risks we have identified should not come as a surprise to those active in the market, but serve to focus attention on the areas we consider to be of most impact and importance. Firms and exchanges need to consider how they have addressed these risks and continue to mitigate against them in the future.”
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