Structured products: IFAs urge FSA to rule on provider communication

‘For a structured product, it’s more black and white [than other investments]. It specifies the terms on the product. So unless the issuer doesn’t follow these terms, it has performed exactly as stated on the tin.’

He said the FSA did not approve of providers bombarding distributors with information, and providers had to make a judgment call on when to make contact regarding extraordinary circumstances.

Challenging the regulator

Smith said the regulator had asked him to consider contacting clients in the event of a counterparty downgrade; but again he challenged it.

‘Product providers have a responsibility under TCF to get in contact in the case of an event that would materially affect the customers getting back the terms provided, and that might not mean a downgrade,’ he said. ‘But if there’s a grave concern of default, that would be such an example where a provider might know first or have access to more information.’

Smith said a downgrade could be a potential advantage for the customer to achieve better terms.

‘We had a conversation with the FSA, saying we could do more harm than good by intervening. We could create panic,’ he said. ‘If you’re a provider and there’s a downgrade of a counterparty, you should consider whether it’s right to tell customers.’

An FSA spokesman confirmed that providers had to make a judgment call on when to contact customers and under what circumstances, but that the regulator wanted to see a consistent process in place.

Calls for universal policy

Philip Humphreys, managing director of Bolton-based Humphrey’s Financial, said the FSA’s reaction to Smith’s arguments and the general lack of universal policy was ‘strange’.

‘We’re [a few weeks] into the new retail distribution review world of full transparency, and for the FSA to come out with that, I think it’s highly strange,’ he said. ‘Structured products should only be recommended and set up for clients who fully understand, therefore if they are made aware of the [downgrade] and they have a degree of knowledge, taught by IFAs, they won’t necessarily panic.’

Humphreys said he wanted to see full disclosure from providers to both advisers and clients, because advisers were not always aware of such changes unless they read the press.