FSA finds weaknesses in structured product design

The FSA has issued further guidance for structured product firms after identifying weaknesses in the way providers design and approve the products.

The regulator assessed seven major providers of structured products between November 2010 and May 2011, who together are responsible for approximately 50% of the UK retail market by volume and value.

While there had been some improvements, the regulator warned there were still weaknesses which increased risks to consumers. Firms tended to focus on their own commercial interests rather than consumer needs, it said.

Following this review, the FSA is publishing guidance that firms should consider when designing structured products and dealing with the after sales process. Much of the guidance is also relevant to other retail products, the regulator said.

Firms should:

• identify the target audience and then design products that meet that audience's needs;
• pre-test new products to ensure they are capable of delivering fair outcomes for the target audience;
• ensure a robust product approval process is in place for new products; and monitor the progress of a product throughout its life cycle.

Nausicaa Delfas, FSA's head of conduct supervision, 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.

"We want firms to consider the issues we raise in this publication, compare their product governance to the guidance we set out and address any areas for improvement. A lack of robustness in a firms' product development and marketing processes can increase the risk of poorly-designed products and lead to mis-selling.

"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. Where we found problems we have taken action with the firms involved.

"This work is a further step towards intervening earlier in conduct regulation and demonstrates that the FSA is already seeking to identify potential consumer detriment at a far earlier stage."

Further and more detailed actions for firms are outlined with the publication. The guidance is open for consultation until 11 January 2012.