The Financial Services Authority (FSA) has fined Credit Suisse for systems and controls failings relating to sales of structured products.
The private banking arm of Credit Suisse UK sold over £1bn of these structured capital at risk products (SCARPs) between January 2007 and December 2009.
As a result of serious failings in their systems and controls relating to those investment sales, the FSA has fined them £5.95m. They have also been ordered to undertake a costly past business review and provide redress to investors if they have lost out financially as a result of unsuitable recommendations.
SCARPS, which are also known as ‘precipice bonds’, offer investors partial levels of capital protection.
The terms of these products differ between providers, although most aim to return the original investment amount at the end of the investment term. However, if the related index or asset price falls below a certain level, some or all of the original investment is lost.
The risks associated with structured products will depend on the specific terms of the product, although it is typically a very long list.
Investors usually have to contend with credit risk, market or investment risk, liquidity risk, receiving no dividend income, capped returns, averaging of index levels, limited participation in market returns, inflation eroding the ‘real’ value of protected capital and tax consequences.
Despite all these risks, structured products are often marketed by banks as a safer alternative to traditional investments. Because some or all investment capital is ‘protected’ in some circumstances, it is easy to see why some investors would believe structured products offer upside participation with limited downside risks.
Every investment recommendation made to an investor by a firm authorised by the FSA has to be ‘suitable’ for that individual investor. This means carefully considering the financial position, aims and objectives of that investor before making a recommendation.
Whenever we see mass sales of an investment product, including the structured products so often favoured by the banks, we question the suitability of what is taking place.
It is very rare for one type of investment product to be suitable for a massive swathe of investors. Whilst providing bespoke investment advice based on individual needs and objectives is naturally more time consuming, we hope that FSA fines such as this will encourage the banks to take their responsibilities for ensuring suitability a little more seriously.
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