Structured products are often too complicated for consumers to understand, leading many to overestimate their expected returns, according to a research paper from the FCA.
While the regulator stated that there is still a place for structured products in the market, it is encouraging firms to re-evaluate the way that these products are designed and marketed to make them more easily understood.
Concerns have been raised that structured products may attract many retirees following the pension freedoms, despite their lack of knowledge of the derivative-based, pre-packaged investment strategies.
Ian Lowes, founder of StructuredProductReview.com, said, “A large proportion of the products recommended by adviser firms across the IFA sector have been among the simplest structures and have delivered exceptional and consistent returns over the years, against a backdrop of challenging and changing market conditions.
“It’s the less well-designed structured investments that negatively impact on the whole sector. The distribution channel that has often been the biggest red flag is banks and building societies selling low value products through low calibre branch advisers to a captive customer base.”
The FCA stated that product providers should ensure that product governance is in favour of the consumer by establishing a clear target market during product development and distribution.
Stress testing should be included as part of the product approval process in order to determine whether the product has a reasonable prospect of delivering economic value to customers in the target market.
Clear information needs to be provided to consumers considering structured products, discussing the likelihood of potential investment returns and risk involved with the investment.
Providers also need to strengthen the lifecycle monitoring of their products, ensuring advisers recommending these products have adequate information and that each product is being distributed to its identified target market.
The FCA also released the results of a survey of retail investors that found they significantly and systemically overestimate the returns from structured products, leading them to prefer structured deposits over alternative investment vehicles.
The survey highlighted the need to further understand which combinations of product features and behavioural biases drive the misconceptions. Behavioural biases can be exploited by product features, which could lead investors to have unrealistically high expectations of product returns and hinder their ability to evaluate and compare products.