March 5, 2015 / 12:21 PM / 5 years ago

FCA warns banks over complex retail products

LONDON (Reuters) - Britain’s financial watchdog has told banks they are failing to meet standards on selling complex investment products and may have to compensate some customers, signalling that enforcement action could be on the cards.

The logo of the new Financial Conduct Authority (FCA) is seen at the agency's headquarters in the Canary Wharf business district of London April 1, 2013. REUTERS/Chris Helgren

The Financial Conduct Authority (FCA) published a review of structured products which are created by banks and range from alternatives to cash deposits to complex investments linked to multiple financial assets or indices.

Regulators released guidance in 2012 to improve standards in a market European Union regulators estimated at 59 billion euros (43 billion pounds) in Britain at the time.

“Our review found some firms are falling below the standards we expect in their approach to the design, manufacture, packaging and distribution of structured products,” the review published on Thursday said.

The UK Structured Products Association, a trade body whose members include banks and others who create and sell the products, had no immediate comment.

All the firms that were assessed will be asked to explain how they will ensure that customers are treated fairly when offering them new products, the FCA said.

Some firms have been asked to determine if customers have been harmed by existing products.

“It is possible that this will result in further remediation work by these firms and could lead to redress for some customers,” the FCA said.

“It could also lead us to consider the use of other regulatory tools,” it added. The watchdog declined to elaborate but lawyers said banks should be on their toes.

“This is yet another clear demonstration of the FCA’s determination to uproot inherently unfair financial products in the UK,” said Etay Katz, a financial services lawyer at Allen & Overy. “The language suggests swift supervisory and enforcement actions will now follow.”

The FCA was set up partly to be more active in defending consumers after a string of mis-selling scandals.

A survey of 384 retail customers showed they were struggling to understand structured products and frequently overestimated potential returns, the FCA review said. Firms must make better efforts to match the design of the product to their customers’ needs.

The European Union’s markets watchdog, the European Securities and Markets Authority (ESMA), said in 2013 it was concerned about possible risks to consumers from the products as they may not be able to understand them.

ESMA has said that Britain’s structured products market totalled 59 billion euros at the end of 2012 or 8 percent of the EU market.

Editing by Vincent Baby

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