Advisers have expressed their anger the role of the FSA in properly regulating structured products has not been addressed and they are being made the scapegoats for failings in the sector.
Many advisers have contacted IFAonline saying the regulator’s own understanding of structured products appears to be lacking and they should have warned advisers much earlier about the risks associated with the products.
Their comments come after yesterday’s report by the FSA, Quality of advice on structured investment products, which highlights a catalogue of failings around how the risks of the products were assessed by advisers.
However, IFAs draw attention to an FSA Factsheet on Capital-at-risk products, issued in February 2004, which makes no mention at all of counterparty risk.
The Factsheet was intended to be issued to consumers with an adviser’s product recommendation to give them more information about the products and highlight the potential risks.
In a section headed up What are the main risks involved with capital-at-risk products, the FSA identifies:
- Your capital can fall below the amount you put in.
- The rate of return advertised might be achieved only after a set period
- The rate of return you get may depend on specific conditions being met.
- If you take your money out early, you may get less than you put in.
There is no mention of the counterparties involved behind the products and the risk to capital if that counterparty should fail, as happened with Lehman Brothers last year.
Stephen Pett, from IFABonus, says: “This is classic FSA. They have all the resources and all the help and yet they expect one-man band advisers to do the same work with misleading information they have provided. They will blame it on everyone else but these products should have been given a ‘risk-rating’ by the FSA. Providers should have been forced to disclose the risks but the key problem was the FSA didn’t understand the products.”
Ian Lowes, director of Lowes Financial Management and a structured product specialist, still issues the Factsheet to clients but also includes an extra paragraph on counterparty risk along the lines of the following: “As with all contracts of this type, the benefits payable under the plan and indeed the ultimate return of capital are dependent on the ability of the behind-the-scenes issuer to meet their obligations.”
Other advisers are also angry it has taken the collapse of Lehman Brothers for the FSA to actively address concerns about the structured products market.
Hargreaves Lansdown is one firm which has been vocal in warning about the hidden risks behind investing in structured products.
Head of research Mark Dampier says: “This is appalling for the adviser industry as a whole. What I want to know is what the FSA has been doing for the past ten years since the collapse of Precipice Bonds? These are complex products but clients just look at the headline rate. Both Peter Hargreaves and I have been warning about structured products for some time now. Doesn’t anyone in Canary Wharf read the papers?”
However, he believes more effective regulation rather than extra red-tape is the answer for these products.
“They should have gone into speak to plan providers and said this is what we want to see and given them a clear warning about what would happen if they didn’t.”
The FSA’s review of structured products could pave the way for regulation of products rather than advice; a move which has already been hinted at by the regulator.
Contact [email protected]. Tel: 0207 484 9783
For more analysis of the structured product review see this week's Professional Adviser out tomorrow.
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