The FCA’s Thematic Review (TR 15/2) found that manufacturers and distributors of structured products have a lot to do to ensure customers are treated fairly.
Retail investors have limited ability to assess complex structured deposits. Accordingly, firms need to ask themselves whether they should be using non-advised sales channels to sell these products. Where products are sold through advisers, providers should consider how they can credibly demonstrate that those advisers have received the information needed to address the effects of investor biases.
Structured products remain opaque in terms of cost disclosure. The FCA’s view is that costs may need to be disclosed as a separate fee, rather than deducted from the investment amount, or built into the products. This is because investors tend to overlook them when estimating realistic returns. Indeed, the FCA found investors’ understanding of structured deposits is limited and expected returns are consistently overestimated.
Firms have failed to appreciate that they need to conduct proper ongoing due diligence on distributors to ensure distribution, in practice, corresponds to what was originally planned or envisaged, given the target market. This might involve collecting and analysing management information so the firm can detect patterns in distribution compared with the planned target market. Providers should be assessing the performance of the channels through which their products are being distributed.
The warnings are clear for both providers and distributors. Firms need to improve product approval frameworks so they are transparent and products represent value for money for end customers rather than purely profit for the provider. How to do this and evidence initial, together with ongoing due diligence, is a question often addressed to Complyport.
For more information contact us at info@complyport.co.uk
