The Financial Services Authority (FSA) has published new guidance for firms on the development of structured investment products.
This guidance follows the assessment by the FSA of seven providers of structured products. These seven firms were responsible for over half of the UK market for these products.
Whilst the review, which took place between November 2010 and May 2011, found some improvements in the design and marketing of these investment products, it also discovered some weaknesses.
The FSA concluded from their review that structured product providers tend to focus on their own commercial interests, rather than the needs of the investor.
The new guidance must be considered by firms when designing and marketing structured products. The FSA hopes that firms will also consider this guidance for other retail investment products.
The four main requirements of this new guidance in respect of structured products are that firms must:
-identify the target audience and then design products that meet that audience’s needs;
-pre-test new products to ensure they are capable of delivering fair outcomes for the target audience;
-ensure a robust product approval process is in place for new products; and
-monitor the progress of a product throughout its life cycle.
These are all sensible requirements and will hopefully help the structured products market to develop a better reputation over time.
Whilst this guidance is open to consultation until January, its publication suggests that the FSA is preparing to get tough on structured products.
Here at Informed Choice, we can understand the appeal of structured products to some investors. In the current low interest rate environment, with volatile investment markets, it is only natural that some investors would want capital security combined with market participation.
Before investing in a structured product, it is essential to fully understand and appreciate the risks involved.
The risks associated with structured products can be extensive. Because there is no way of breaking the link between risk and reward, investors seeking returns with no capital risk are simply substituting risk to their capital with other forms of risk.
In our opinion, structured products should not be sold to cautious retail investors, particularly in the banking sales environment where the risks are unlikely to be fully comprehended before an investment is made.
We welcome this new guidance from the FSA and hope to see tough action taken against structured product providers (and distributors) who do not adhere to this, putting investors at risk.
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