Advisers may be forced to bear the cost of outsourcing structured product advice to third parties post RDR, following a damning FSA report into failings in the sector.
A fundamental lack of understanding amongst some advisers of how structured products work and their suitability for different clients has been identified by the regulator as a key factor behind inappropriate sales of Lehman-backed products to consumers.
Its report, Quality of advice on structured investment products, could pave the way for heightened consumer complaints against advisers as it highlights a catalogue of failings around how the risk of the products was assessed. Three adviser firms have already been referred to the FSA's enforcement division over failings relating to Lehman-backed product sales.
The report identified a clear failure to understand counterparty risk; an inability to differentiate between structured investment products and structured deposits; issues around client suitability and a lack of understanding of charges.
It says advisers must ensure they have adequate research facilities in place to make suitable recommendations on structured investments, and those without a thorough understanding of the market should not be offering the products.
However, there appears to be a contradiction in the FSA's approach as despite concerns about advisers' overall knowledge level of the structured product sector, under current RDR proposals, they must consider the products to be called ‘independent'.
For firms not comfortable advising on these products, the FSA's suggestion is outsourcing may be their only option.
An FSA spokesman says: "We would stress advisers should only recommend products where they feel they have a competent level of knowledge. If they do not have an adequate understanding of structured products then they may need to refer clients to a specialist."
The FSA says not all clients would need to have structured products considered as part of their financial planning needs, as the relevance of the products would be dependent on their risk profile.
However, the structured products review suggests many advisers found it difficult to adequately assess the risk profile of their clients.
"We identified issues in some firms around processes for assessing a customer's attitude to risk," the review says.
"This meant some firms placed customers in incorrect risk categories and provided unsuitable recommendations as a result."
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