Advisers-Where was FSA guidance on counterparty risk?

No Surprises

Like our dear Govt. everyone else is to blame apart from them. It was ever thus from Equitable Life on.

Posted by: N Clemens

Structured Products

To FSA.GOV.UK and the many advisers (qualified FSA authorised fools) who have contacted IFAonline saying the regulator’s own understanding of structured products appears to be lacking and they should have warned advisers much earlier about the risks associated with the products. In a nut shell both FSA GOV.UK for allowing placement and ADVISERS who placed structured products ignoring the investors protection should be fitted with cement shoes and dumped from the deepest point of the Atlantic Ocean. One of the first things I noticed when I look at these products was no Policy Holders Protection or similar protection for the UK or International investors.

Posted by: Charles Bunbury

Error 404

I visited the FSA website for a copy of the February 2004 document but got "Error 404: The page you are looking for might have been removed." I checked documents above and below and they were available. So I had to retrieve the FSA document about risks to capital from my own library.

Posted by: Ken Durkin

We will learn!!

Can we as a group issue this statement "We will learn from this experience and will aim to put measures in place to ensure this does not happen again. However no one will be censured over their shortcomings". After all this is the statement continually issued by government departments. Where as there are currently many individuals worried sick over this who won't be in business to worry about RDR. Also if it is that easy how come no one in the FSA saw RBS and HBOS heading for the brink?

Posted by: Joanne Adrain

Counterparty Risk

..So having checked that the policy had counter party risk and confirmed the company providing with this was AA rated...

Posted by: George

For the purposes of this example

assume you are a client in 2008 and your adviser has assessed your risk, explained about the bond issuer and the fact that they are A rated or whatever and that provided they don't default i.e. fail to meet their promise / pay theri debts.do a runner or any other term the common man might understand, then the product should do what it says on the tin i.e rise or fall/fail dependent upon the indice it's tracking and the adviser says, yes the counterparty is Bear Stearns. Lehmans, Barclays, Citigroup or whoever. The client goes home and thinks I'll just check the FSAs consumer pages as whilst I understand about the risk and what the adviser said to me, it was when they mentioned "counterparty I struggled with the jargon, but the nice man/woman said if I want to know more about structured products got to the FSAs website. SO off they toodle to find out what this name "counterparty" is saying I'll put it in on search on moneymade clear and see what comes up. You try it and see what it comes up with, even NOW..... Nothing. So for the FSA to imply that advisers did not explain risk properly when counterparty was NOT a client facing term is disengenous at the best or an attempt to offload blame to the wrong culprits. We explained risk using the FSAs OWN documents and many of the product providers who have now been forced in to administration do to POTENTIAL claims ncluded the FSA Facsheet in their brochures!What more did the FSA want?

Posted by: Phil castle

Plan Managers

They set up the product and produce the brochure and explain if the index does this that and the other we'll return your money with a suitable bonus. They receive the client money and the Plan Manager's job is to return that money to the client when the market conditions have been met. They are responsible for the money. They are not a cowboy outfit, they are regulated by the FSA. Therefore, clients trust them. Don't let them come back and say "Sorry, we have lost your money - a bank we dealt with has gone bust!" There should be no counterparty risk. They should be insured against this sort of risk so that they can produce the client money according to the brochure.

Posted by: Ken Durkin

Sorry Ken

My point was that a lot of the brochures DID say if the issuer went bust (or in words to that effect), then you could loose your capital completely, but the rating of the institution (as even the FSA agreed) should have been an acceptable comfort to the client. The problem re counterparty being mentioned (or not) in the FSA report is that it is not on ANY FSA consumer facing document and hence we would not have used it in ANY of our explanations to clients as we would have been explaining in the terms/jargon available on the FSA structured pages of moneymade clear.

Posted by: Phil Castle

No future risk

My point is that if Plan Managers want to continue producing these products there should be no counterparty risk. If there is counterparty risk then the product should be banned. Let the providers take full responsibility...

Posted by: Ken Durkin

NOTHING IS RISK FREE : NO, NOT EVEN DEPOSIT ACCOUNTS

Would you also like mutual funds to come without any risk? Structured products carry counterparty risk: FACT. Further fact, credit risk is a form of performance risk, in the same way as an equity can go to zero so can an institution go bust. The FSA, via the Treasury, stated to Parliament, in the EDM debate led by Ed Vaizey, that the insolvency/default of Lehman Brothers was viewed by the FSA as a performance issue, which the FSA does not regulate. BUT, the FSA does regulate providers and require that they are clear, fair and not misleading. The actions they have taken against providers are not down to Lehman going bust. It is because of product literature not detailing thr risks and consequences of this happening properly, along with other issues such as processes and controls. Advisers have been caught in the review because their advice was not competent. Some of this related to counterparty risk, and indeed many points made are valid, however the FSA has stated that it is not applying post Lehman knowledge to pre Lehman advice. But, soem advice issues have nothing to do with structured products, the FSA has found that portfolios weren't properly diversified and tax wasn't considered, etc. They would have found these issues of bad advice whether it had been a structured product review, or a mutual fund, etf, hedge fund, mortgage review, or whatever. Structured products can remove market risk, or change the risk/return profile of market/asset exposure. But, there may be market risk, if a barrier is used. And there is always counterparty risk. It can be properly detailed. And the FSA is now determined to ensure that it is. And proper advice can still accomodate advice on structured products. And the FSA is also determined to ensure that this is so. The RDR paper makes this clear : independnet advisers will need to have knowledge of structured products and use them when appropriate, if they want to call themselves independent. Personally, I'd view an adviser not competent enough to offer advice on structured products as incompetent and incpabale of offering investment advice per se.

Posted by: ANON

To anon

Whilst I disagree with little of what you have said, it is the implication and hindsight effect which I think gets most of our goats (and I wish you would not post anon). Counterparty risk is an issue, but to be fair to those advisers who will now be caught up unfairly in this debacle who DID explain risk of default of the bank backing the product which can be referred to as the counterparty, the report implies it is the lack of mention of this word in suitability reports and the fact the marketing literature was in the FSAs view misleading (not using the word counterparty as the word does not even appear on the FSA's Moenymade clear website nor mentioned in the Small firms section) which I take issue with. Many of these products had been in existance for about 10 years in one form or another and the literature changed little from tranche to tranche, so if the FSA had concerns that the information was misleading or put too much emphasis on one area (gttess) at the expense of risk, they had amole time to address this and the FSAs OWN consumer facing literature, i.e. the Fachstees were often included in or with the brochures or by the IFA if not included. I can see Ken DUrkin's point now in that to some extent, unless structure products are restructured so that the majority of the monies become deposit based (so as to get FSCS protection) with a tranche then siphoned off as effectively a bet on the index coverd by the counterparty, then the structured product market for smaller investors (i.e. via ISAs) is now dead as if we appraoch this from an asset allocation perspective (FSA now saying no more than 25% in structured products at all without a justifiable reason in their opinion, then to have even 7k in a structured product, a client will need 28k total and an IFA who has a client with £100k can now only put 25k in structured products (we might have used four different products in the past with different counterparties and time scales) without fear of being held liable. Now I'd prefer the client to actually invest directly through mutual funds etc, but if the peace of mind of strucure is important to them and they consider that an A rating of the counterparty is sufficient peace of mind and they don't (didn't) think the banking system was going to collapse, should I force them in to a managed portfolio or advise them that the simplicity of the structured product, provided the (what is now being called counterparty risk)is acceptable to them is a suitable alternative. I thought the FSA wanted to see MORE use of structured products not less......

Posted by: Phil Castle

Hedge essential

Wealth managers who refuse to use structured products are putting clients' money at unnecessary risk. In a portfolio there needs to be an investment that will produce a substantial return without market growth. Because these investments are an essential part of every portfolio (notwithstanding the plethora of wise after the event IFAs),Plan Managers should take full responsibility for the money handed to them. They should be insured against any counterparty loss. FSA regulation should be responsible for sorting that out. It is a market solution to the problem. The taxpayer cannot afford to provide any more free insurance for counterparty losses suffered by financial institutions.

Posted by: Ken Durkin

FSA CP188 July 2003

The FSA addressed counterparty risk (3.37-3.39) in CP188 "the risk may be low, particularly if the provider enters agreements with well-rated counterparties, but the investor must understand that this risk exists". If the "low risk" is mentioned in the brochure any adviser would point this out - but would any adviser see the need to exagerrate this risk by repeating it in writing? Whenever money is handed to a financial institution there is the risk of losing that money. Everyone knows that.

Posted by: Ken Durkin

Counterparty risk

What a good idea - to make the providers insure against counterparty risk. Er... but where? Shall we add it to the £50 trillion+ risk already held in the credit default swap market? Perhaps not as this is rumoured to be the next area to implode. No, better to make the banks who are the major providers of such investments (particularly Barclays who does of lot of this sort of thing to get its free asset ratios up), pay losses from their considerable reserves. After all, between them they have £6 billion this year alone which is just kicking around and having to be used to pay bonuses. Now, counterparty risk which correspondents seem to think the FSA knew nothing about previously and did a quick reading up job, was very well known to them. The FSA has a whole lot of client-facing literature on counterparty risk. Trouble is its all facing the wrong clients, it's facing investment bankers and investment houses. Just do a google search. I refer you, for example, to 'BIPRU 13 Counterparty Risk', which gives links to other areas for details rules on the use of counterparty risk. So they knew well about it but did not think it of concern enough to tell us about it. Any decent lawyer would make mincemeat out of the FSA in court. Why ever did that fellow Brown give them such immunity? Which rather begs the question, where is the equivalent FSA report to the one in which they have criticised IFAs re counterparty risk assessment for the bankers who are the users/abusers of counterparty risk? This should be one measure of the FSA's 'fairn and even-handed approach'. No bets on whether there will ever be such a report though! Is there anybody out there reading these blogs who has political contacts? This is the sort of stuff that needs to get to Cameron for eventual action.

Posted by: Orlando Furioso

Cover for the counterparty risk

AVIVA launched a bond a week or so ago where the counterparty risk is supported by collateral offered as security, so this will now have to be considered by anyone looking at a structured bond without this back up as would a client be more comfortable with an A rated counterparty with no collateral back up or one with?

Posted by: Phil Castle

FSA actually pulled the consumer factsheets BEFORE Lehman's

Please see the below which I have shortened; To FSA, OK in that case it raises several questions in itself. 1. Why was it withdrawn and why in April 08? 2. Why was it not replaced? 3. Why is there no mention of it's withdrawel and lack of replacement in the recent FSA paper entitled "Quality of advice on structured products Oct 09"? 4. Is there an intention to replace it with an updated consuemr "Factsheet"? 5. If so, when? Phil Castle Director From FSA Your enquiry You are seeking information concerning an FSA factsheet, specifically when was it removed from the website and was it ever replaced. Our response I have referred the matter to our publications team who have confirmed that the factsheet was withdrawn on 1 April 2008. Some information about these types of product can be found in the saving and investing guide - http://www.moneymadeclear.fsa.gov.uk/publications#saving_and_investing I trust this is of assistance. Yours sincerely Philip Bellars (Mr) To FSA I regularly point clients to the Moneymade clear website and encourage them to make use of the FSA's free guides. As a result of question from a client, can you confirm when the attached FSA Guide was removed from the FSA's website please and whether the Feb 2004 version was replaced? Phil Castle Director

Posted by: Phil Castle