The UK Financial Services Authority is proposing new guidance to firms on retail structured product development, designed to ensure that products target client needs, not just corporate objectives.
The FSA said Wednesday it has reviewed seven major providers of structured products, which are responsible for approximately 50% of structured products in the UK retail market by volume and value, and found that weaknesses remain in the way firms are designing and approving structured products, which increases the risk to consumers. Firms tended to focus on their own commercial interests rather than consumer needs, it says.
Following this review, the FSA is now publishing guidance that firms should consider when designing structured products and dealing with the after sales process. Much of the guidance is also relevant to other retail products, it notes.
In particular, it says that firms should: design products to meet the need of an identified target audience; pre-test new products to ensure they are capable of delivering fair outcomes for the target market; ensure a robust product approval process is in place for new products; and, monitor the progress of a product throughout its life cycle.
“Structured products are rising in popularity in today’s low interest rate environment, and we are concerned that the growing number of structured products, as well as increasing product complexity, is placing a strain on firms’ systems and controls,” said Nausicaa Delfas, the FSA’s head of conduct supervision.
“We want firms to consider the issues we raise in this publication, compare their product governance to the guidance we set out and address any areas for improvement. A lack of robustness in a firms’ product development and marketing processes can increase the risk of poorly-designed products and lead to mis-selling,” Delfas added. “Many of the problems we found with the product design process were rooted in the fact that the firms are focusing too much on their own commercial interests rather than the outcomes they are delivering to consumers.”
The new guidance comes as the FSA continues to shift its focuses to earlier intervention to prevent consumer harm, rather than reacting once the damage is done. The guidance is open for consultation until January 11, 2012.
Earlier this year, the Ontario Securities Commission announced the creation of a new advisory committee focusing on investment fund products that is designed to ensure that it stays on top of emerging issues in this area too, as products have become increasingly numerous and complex.