The FSA has stressed firms need to have robust controls and transparent product approval methods when developing retail structured products.
In final guidance on the development and governance of retail structured products, published today, the watchdog said several weaknesses remain in product governance arrangements, including a "lack of strategic purpose" in the manufacturing domain.
At the governance level, it identified a number of weaknesses in the way firms identify target markets which could have detrimental consumer outcomes.
"We found firms focused too much on their commercial position, potentially at the expense of consumer outcomes," the FSA said.
It stressed firms must identify the target audience and then design products that meet the target audience's needs - rather than those which contribute towards the firm's bottom line.
Firms should also stress-test new products to ensure fair consumer outcomes and monitor the progress of a product throughout its life cycle.
It added firms are failing to consider the question of what consumers need and want, instead focusing too much on the commercial imperatives.
The problems were identified in a review conducted by the regulator.
It revealed it is already taking action against some firms - requiring them to implement "significant" changes in product governance arrangements - and issued a warning it will pursue other firms where weaknesses have been identified.
The regulator also highlighted ongoing concerns previously identified in the structured product market, including lack of due diligence when assessing counter party risk and inadequate testing of product features.
"We found that, broadly, firms lacked a clear strategic purpose in manufacturing structured products, or at least were unable to articulate a coherent strategy.
"We believe this fed through into their product ranges, which we felt were disproportionately influenced by pricing and market pressures," the paper said.
The watchdog stressed firms must have "transparent and auditable" product approval frameworks geared to the delivery of fair consumer outcomes. Review mechanisms should also be put in place to prevent what it described as "product creep".
Conflicts of interest between firms and consumers should be managed too, it warned.
"Overall, we expect firms to have a product approval process that is robust and fit for purpose; ensure that it is implemented properly; and review the process regularly," it said.
It added provider firms should consider the risk profile and willingness of investor to accept capital loss in their product design.
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