Structured products

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The current FCA Handbook defines a structured capital at risk product (SCARP) as a pr...

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The review focussed on the design, marketing, distribution and advice provided in relation to these products, and considered whether firms had properly understood, monitored and disclosed the risks associated with structured products, including, in particular, the risk to capital and the credit risk. It also considered whether adviser firms had properly assessed the suitability of such products for individual investors and questioned the systems and controls in place within firms to manage and monitor these practices and deal with the potential risks arising out of them.

The review was across 11 firms, and the regulator found instances of unsuitable advice in nine of them. Unsuitable advice was found in almost half all cases reviewed.

The regulator found deficiencies both in the marketing and selling of the structured products that it reviewed, as well as shortcomings in firms' systems and controls and their understanding of the products themselves. The regulator took action to remedy the detriment already suffered by consumers, to ensure that in future investors are treated fairly, and to address issues in the wider struc...

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Misleading explanation of counterparty risk

Failure to provide information on the product recommended, or providing information on the wrong product

Factually incorrect information in suitability reports

Systems and controls

The regulator’s assessment focused on the three main areas that they considered to have the greatest impact on the provision of suitable advice:

1. Consideration of individual product features and their suitability for different types of customers:

Advisers should consider the features of each structured product and how appropriate they might be for certain groups of clients

Undertake sufficient research over and above the product providers’ marketing literature to determine the risks of specific product features

Where research is done centrally, these assessments should be issued to advisers and the outcomes monitored

Research should seek to identify the underlying counterparties and their financial strength

2, Advisers’ understanding of structure product investments:

Advisers should possess a sound understanding of how structured investment products work, including the key risks, in order to be competent to provide advice on them

3. Compliance monitoring, oversight and management information:

Firms should employ appropriate monitoring and oversight arrangements

Monitoring should focus on the specific risks and not be solely process-based

Firms should have appropriate MI to monitor and review the advice on structured products

Structured deposits are often covered by the FSCS, although it is vital that material is checked to confirm this.

Structured deposits have some similarities with structured investment products which offer 100% ...

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Rates of return described as 'guaranteed' where they are, in fact, 'fixed'

Prominent branding by one firm which may mislead consumers into thinking that it is the deposit-taking firm responsible for the security of their money for most of the product’s lifetime

Worked examples that are potentially misleading due to product complexity

Percentage returns and participation rates that are capable of being confused

Inconsistent and confusing description and classification of structured deposits.

The key findings of this review found that there were still a few areas that required some improvement, and so the final guidance outlined eight key areas of product development and governance:

Product approval procedures – The FSA expects firms to have a product approval process that is robust and fit for purpose, to ensure that this is implemented properly, and to review the process regularly

Identification of target markets and generation of product ideas – Consideration of the target market should permea...

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Post sales responsibility – Firms should periodically review their products to check:

- Whether the product is continuing to meet the needs of the target market for which it was designed, and

- Whether the product’s performance will be significantly different from that which was originally expected and communicated to the distributor or customer before the sale.

Where the review uncovers issues, the provider should consider what action it will take for existing customers, weighing up the impact of taking action against the impact of doing nothing. They should also consider the impact of any communications they issue, such as the potential for consumers to exit the product early and crystallise a loss.

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The Packaged Retail and Insurance-based Investment Products Regulation (PRIIPS), and the Markets in Financial Instruments Directive II (MiFID II), both imposed more detailed requirements on firms manufacturing and distributing structured products to retail customers.

Following a sample review of the structured deposit sector the regulator identified a number of key issues

The regulator states tha...

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