FSA warnings over structured products

Structured products offer a “guaranteed return” for a fixed time period usually dependent on the return of a number of financial stock indices. The regulator has revealed it worried the growing number of structured products is placing a strain on firms’ systems and controls.

The City watchdog made its comments after assessing seven major providers of structured products and uncovering weaknesses in the way firms design and approve their products, thereby increasing the risk to consumers.

As a result of its assessments, the FSA today (2 November) introduced further guidance for firms when developing new structured products which they want to market to consumers.

Nausicaa Delfas, head of conduct supervision for the FSA, said: “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.”

“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.”

This is the second piece of guidance the FSA has published focusing on product design. Yesterday, the FSA and OFT jointly published guidance for consultation aimed at firms that are developing, or planning to develop, protection products similar to payment protection insurance.

The main problem with structured products is understanding exactly what you are buying and a proper assessment of the financial strength of the institution who provides the guarantees. With so many of the banks in trouble right now, it is a brave person who buys a structured product