WIREDGOV

The Financial Services Authority (FSA) has today announced tough and wide-ranging action to help investors who received unsuitable advice or misleading promotional material when they bought a Lehman-backed structured product, as well as measures to address issues in the wider structured products market.

This follows an FSA review of the marketing and distribution of structured products, particularly those backed by Lehman Brothers, to achieve the best outcome for all investors who were affected by the insolvency of the firm. 

The FSA found significant advice failings on Lehman-backed products in most of the financial advice firms sampled, as well as serious deficiencies in the marketing literature provided by a number of the plan managers selling these products.

As a result, the FSA is taking direct action to address the detriment this has caused for investors with Lehman-backed products and robust steps to ensure all future structured products investors are treated fairly, including:

Lehman-backed structured products

• following the FSA’s review of their promotional material and its subsequent discussions with the firms, three plan managers that packaged and marketed Lehman-backed structured products - NDF Administration (NDFA), Defined Returns Limited (DRL) and Arc Capital and Income plc (ACI) - have gone into administration.  As a result, investors who purchased Lehman-backed structured products through these firms may be entitled to compensation from the Financial Services Compensation Scheme (FSCS).  The firms’ administrators are contacting investors with information on how this affects them;

• issuing all firms that gave advice to investors on Lehman-backed structured products with a template they should use to deal with customer complaints - it outlines the criteria the FSA expects them to use to assess the advice they gave to ensure investors are treated fairly and consistently;

• writing to all remaining investors that will not be contacted as a result of the plan managers’ administration, and publishing guidance, to help investors consider what steps to take, including making a complaint, if they believe they were misled by product literature or received unsuitable advice;

• referring three advice firms to enforcement for giving unsuitable advice, and instructing other advisers it looked at to review past sales of Lehman-backed structured products and pay redress where appropriate;

• providing clear guidance to all firms advising on structured products (both those backed by Lehman Brothers and other firms) on the standards it expects them to meet, including examples of good and poor practice it identified during its review;

Wider structured products market (non Lehman-backed)

• writing to the largest sellers of other structured products, asking them to examine how they have sold these products in the past against the standards reiterated by the FSA today and, if necessary, to review past sales and provide investor redress where appropriate, as well as change their approach for future advice and sales; 

• in the course of 2010 the FSA will undertake follow-up assessments to ensure that firms are meeting its advice standards; and

• following-up with plan managers where the FSA had concerns about their marketing of non Lehman-backed structured products, to assess whether firms’ current literature meets its requirements, and setting out the standards it expects firms to meet when designing and marketing structured products.

Dan Waters, the FSA’s director of conduct risk, said:

"We are committed to ensuring that retail financial services markets deliver fair outcomes for consumers.  The focus of our review has been to achieve the best possible outcome for as many people as possible that invested in structured products backed by Lehman Brothers.  This is a hugely complex area given the number of different firms involved, and there is no one-size-fits-all solution for these investors. 

"However, given the failings we have come across in the marketing and selling of these products, today we are setting out a package of robust measures to help those who have lost money.  We are also taking decisive action to address issues in the wider structured products market to ensure that all future investors will be treated fairly – and we will not hesitate in taking action if firms do not take sufficient steps to respond to our concerns."

Notes for editors

1. The FSA has today published a number of documents relating to its review:
   • "Quality of advice on structured investment products", which sets out the findings of the FSA’s review of advice on Lehman-backed structured products and the standards it expects all firms to meet;
   • The template and accompanying guidance for firms when assessing the advice they gave;
   • The findings of its review of the marketing material used by plan managers to promote structured products not backed by Lehman Brothers; and
   • Its expectations of plan managers when designing and marketing structured products.

In particular, these documents set out the standards firms need to meet when providing advice on, marketing and designing structured products:

Advice

When recommending structured investment products, the factors that the FSA expects advisers to consider include, but are not limited to, the following:

• whether the customer has sufficient emergency funds;
• the customer’s timescale for investment;
• whether the customer has a potential need for liquid capital during the period of investment and, if so, whether capital has been set aside for this purpose;
• if the investment is designed to provide a set return on a set date to meet a future need for money but the contract has the potential to mature early, what this may mean for re-planning, re-investment, and, hence, potential additional expense for the customer;
• whether the customer has any existing liabilities that may best be repaid before considering investment; and
• the implications of recommending a fixed-term product that cannot be cashed in according to market sentiment.

Marketing material

Financial promotions for structured investment products must:

• be clear about where customers’ money is invested, which may include explaining that it is not invested in an index but is loaned to a single financial company;
• clearly explain any relevant counterparty risk;
• prominently state that capital is at risk (if that is the case);
• use language that the target audience is likely to understand;
• not describe a product as ‘protected’ or ‘guaranteed’ if this is an inaccurate or misleading description; and
• explain the circumstances in which Financial Services Compensation Scheme coverage applies, and where it does not.

Designing products

Firms should:

• state clearly and prominently key product risks, and to assess these against prevailing market conditions;
• assess continually any risks posed to the product before and after the sale, and take action to alert investors if contingency action needs to be taken;
• carry out due diligence in the selection of the securities issuer, using a range of sources; this includes the regulatory regime to which the counterparty is subject;
• ensure all relevant risks - market, liquidity, counterparty - are accurately identified and stress tested during the design process;
• ensure products – covering all elements of design, including counterparty -  are suitable for the target audience, given the risk tolerance and preferences of that audience;
• act with due care and diligence when passing on promotions they have created to distributors;  
• ensure systems and controls offer an effective framework for risk management in a range of market conditions; and
• consider the legal characteristics of the product and ensure they comply with all the relevant regulations.

2. The FSA has today also published a factsheet for structured product investors on its consumer website Moneymadeclear.
3. On 14 October 2009, NDF Administration Limited (NDFA) and Defined Returns Limited (DRL) announced that they have gone into administration, and on 26 October 2009, Arc Capital and Income plc (ACI) announced that it has gone into administration.  These plan managers offered a variety of retail financial products, including Lehman-backed structured products.  Further information is available on the FSA website.
4. Additional information on the FSA’s review can be found on the Wider Implications website.
5. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.