The FCA has published Thematic Review 15/2: Structured Products: Thematic Review of Product Development and Governance (TR15/2). TR15/2 is relevant to all firms involved in any stage of the design, manufacture, packaging and distribution of structured products.
In TR15/2, the FCA sets out its findings from its latest review of the structured products market which focused on better understanding consumer behaviour and the way that firms approach product development and governance.
The FCA’s consumer research found that retail customers struggle to understand the features common to many structured products. They also overestimate potential returns. These findings reinforce the importance of firms identifying a clear target market for their products and ensuring this information permeates their design and distribution strategy. Further information can be found from the following behavioural and qualitative research:
- Occasional Paper No.9: Two plus two makes five? Survey evidence that investors overvalue structured deposits; and
- Structured Products – Qualitative research with consumers.
The FCA’s discovery work identified weaknesses in the way that some firms approach product design and governance. The work suggests that firms’ senior management must do more to put customers at the forefront of their approach to product governance. This includes:
- identifying a clear target market during the initial product design phase and then using this information to inform each subsequent part of the product development and distribution strategy;
- ensuring structured products have a reasonable prospect of delivering economic value to customers in the target market. Firms must be able to determine and evidence this via robust stress testing as part of the product approval process. Products that fail this process should not be manufactured nor distributed;
- providing customers with clear and balanced information on each product and any risks. This is particularly important for information explaining the likelihood of potential investment returns and any risks to the customer’s capital;
- strengthening the monitoring of their products. This includes ensuring distributors have enough information about the manufacturer’s product to sell it appropriately and checking that each product is being distributed to its target market; and
- applying effective product governance to ensure customers are treated fairly (including best execution where relevant) throughout the lifecycle of a structured product.
All of the firms that were in the FCA’s review will be asked to explain how they will ensure the fair treatment of customers for the new structured products they bring to the market. The FCA will also continue to monitor the structured product market to check whether firms are meeting its requirements.
View TR15/2: Structured Products: Thematic Review of Product Development and Governance, 5 March 2015