In today's Retail Conduct Risk Outlook the Financial Services Authority (FSA) identified the five products it feels pose the greatest mis-selling risk to consumers.
The FSA said the slow economy is pushing consumers towards products which are unsuitable for them, either in terms of risk, meeting their requirements, or their understanding of the products.
The five products the FSA identified as posing the greatest risks to consumers are as follows.
The FSA is concerned that consumers are buying into structured products with little understanding of the counterparty, inflationary and market risks involved. The regulator is also worried that some structured products appear to offer 100% capital protection when they do not.
Traded life policy investments (TLPIs)
The FSA noted that TLPIs are "complex" products which are "frequently marketed on the basis that they have no correlation with other asset classes... and are therefore low risk", when they are not.
The regulator already consulted in November 2011 on the consumer detriment caused by TLPIs, but it said it has received many more new applications from firms wanting to sell them. The FSA said it intends to ban all marketing, including that delivered in the context of financial advice, of TLPIs to retail investors.
Unregulated collective investment schemes (UCIS)
The FSA said UCIS are usually only suitable for institutional investors due to their high risk and the lack of redress through compensation schemes and ombudsman services.
However, it noted that some UCIS are being deliberately marketed to retail investors for whom they are inappropriate. The FSA said it will improve consumer protection from UCIS mis-selling later this year.
Exchange traded products (ETPs)
The term ETP covers a wide range of products and some invest in risky, exotic markets, the FSA said. The regulator claimed consumers and their advisers do not fully understand the risks posed by ETPs and therefore consumers are being exposed to risk inappropriately.
The FSA said it is working with EU regulators to improve the consumer protection from ETP mis-selling.
Absolute return funds (ARF)
Consumers often believe ARFs come with capital protection or a guarantee of a position return, and will suffer significant, unexpected losses if the funds underperform, the FSA said. It also said the complex trading strategies used by ARFs are difficult for retail investors and financial advisers to fully understand.
The FSA said it is working to better assess the risk attached to ARFs and warned IFAs that they must properly understand the funds before they recommend them to clients.
‘Important to have an anchor’
Report to be written by TPR
Lack of innovation for solutions
Some 2,000 consumers affected