FCA threatens fines to remedy structured product failings

FCA threatens fines to remedy structured product failings

Structured product firms could be hit with further fines, forced to set up consumer redress programmes, or proscribed from marketing products to certain consumers, if they do not correct a range of failings identified in a thematic review by the regulator.

In a paper published today (5 March), the Financial Conduct Authority outlines findings of a review which included nine firms that supply retail structured deposits of the type typically offered through high street banks as well as other ‘capital protected’ structured investments.

A number of firms have been asked to “assess their historic approach to product design” to determine whether customers “may have lost out as a result of any deficiencies”. It added this could result in “further remediation work... including redress for some customers”.

Should this fail to address FCA concerns, the watchdog said it may seek to impose further ‘enforcement action’, intervene in product disclosure and marketing, or seek to limit marketing to certain groups of consumers.

In June last year it handed down fines of £3.8m to Yorkshire Bank and Credit Suisse International over the promotion of a structured product aimed at mainstream consumers.

The regulator’s review found deficiencies across a broad range of areas that have been set out in previous guidance and that form part of firms’ principles for business, including in relation to identifying the needs of the target market, stress testing, value for money and benchmarking.

The FCA also found that firms were failing to conduct proper ongoing due diligence on distributors, such as financial advisers, that are selling the products to clients, with training for private banks in particular identified as broadly lacking.

The paper states: “Firms should review whether distribution in practice corresponds to what was originally planned or envisaged for distributing their products, given the target market.

“This involves collecting and analysing appropriate [management information] so the firm can detect patterns in distribution compared with the planned target market, and can assess the performance of the channels through which its products are being distributed.”

The FCA reiterates that in addition to initial due diligence on distributors, it expects firms to conduct “continuing due diligence [that] would include monitoring their distributors to ensure that products are reaching their target market”.

On the needs of consumers, the regulator said too often firms were focusing their consumer research on what would make a product “attractive” for marketing purposes, rather than on needs or objectives of consumers.

It cited especially that a number of firms sought to only sell ‘simple’ products to consumers, but that definitions of such were varied and its own sampling found most were ‘medium’ to ‘high’ risk.

It also raised issues with firms value for money and benchmarking thresholds, saying these often relied on “maximum rather than most likely returns”.

Its own ‘unadjusted’ sample of return projections, which ignored fees and risk disparities, found most deposits for example were likely to underperform the five-year National Savings and Investments guaranteed growth bond, or the “leading five-year deposit rate”.