I tend to cover holistic matters in my articles but this month I have focused on the topic of structured deposits, given the attention these products have had in the past and are likely to continue to garner going forward. The FSA first published guidance in respect of structured deposits in March 2012 and the FCA followed in March this year with results of the thematic work it conducted on them.
The FCA is very focused on keeping the Treating Customers Fairly agenda front and centre but also how customer behaviour can be irrational and lead to potentially poor outcomes. In addition, as Mifid II and the application of its rules to insurance, pension products and structured deposits gets ever closer, it is not surprising the regulator commissioned research in respect of customers’ understanding of structured deposits.
The research highlighted a number of interesting findings. As we might expect, customers were generally quick to overestimate the returns from such a deposit, which tends to suggest they are likely to be disappointed with the investment before it has even started. Ironically the research found that customers needed to be offered relatively high rates of return on risk-free deposits for these to be considered.
The FCA published its findings in respect of product development and governance. The emphasis this time is on both the distributor and provider – so not just about how the product is designed but what governance sits around it, how it is presented and “sold” to the market and who has the regulatory responsibility at different parts of the investment process. These products have generally been sold to customers of larger financial institutions on a non-advised basis but with such a mismatch over reality and expectations can such an approach continue, particularly given the products’ underlying complex nature?
That being said the advice process could well through up challenges mentioned earlier and in respect of responsibilities for the communication being clear, fair and not misleading.
What you need to know
Here are the key FCA expectations for the promotion and recommendation of structured products:
- Has the target market for the product been clearly identified through robust product governance strategies?
- Does the product have a reasonable prospect of adding value to customers?
- Is the literature produced to support the product clear and easy for customers to understand?
- What information is provided to the distributor? Is it balanced for them to consider the product for their customers?
- How is the performance of the product monitored?
- Are controls in place to identify product rollover? Will the customer retain the product for the full term?
- Are there fixed term deposits that will provide higher returns?
The interaction between product provider and distributor/adviser has been on the regulator’s agenda for some time and reference to the “Responsibilities Between Product Providers and Distributors for the Fair Treatment of Customers” paper from 2007 is still very relevant in relation to this topic. The critical question is whether the end customer has a product that provides value and is understandable. Despite the efforts made by many firms to improve their documentation and communications, FCA Principle 7 (clear, fair and not misleading communications) is still a big challenge based on some of the material we have seen in relation to this type of product whether advised to the customer or not.
Simon Collins is managing director of regulatory at Eversheds Consulting.