Financial Conduct Authority
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FSA publishes review of firms' structured product design processes and proposes new guidance on retail product development

The Financial Services Authority (FSA) has today introduced further guidance for firms when developing new structured products which they want to market to consumers.

The FSA assessed seven major providers of structured products, responsible for approximately 50% of structured products in the UK retail market by volume and value. The review was conducted between November 2010 and May 2011 and found that while there had been some improvements, weaknesses remain in the way firms are designing and approving structured products - increasing the risk to consumers. Firms tended to focus on their own commercial interests rather than consumer needs.

Following this review, the FSA is publishing guidance that firms should consider when designing structured products and dealing with the after sales process. Much of the guidance is also relevant to other retail products.

Firms should:

  • identify the target audience and then design products that meet that audience's needs;
  • pre-test new products to ensure they are capable of delivering fair outcomes for the target audience;
  • ensure a robust product approval process is in place for new products; and
  • monitor the progress of a product throughout its life cycle.

Further and more detailed actions for firms are outlined with the publication. The guidance is open for consultation until 11th January 2012.

Nausicaa Delfas, FSA's head of conduct supervision, said:

"Structured products are rising in popularity in today's low interest rate environment, and we are concerned that the growing number of structured products, as well as increasing product complexity, is placing a strain on firms' systems and controls.

"We want firms to consider the issues we raise in this publication, compare their product governance to the guidance we set out and address any areas for improvement. A lack of robustness in a firms' product development and marketing processes can increase the risk of poorly-designed products and lead to mis-selling.

"Many of the problems we found with the product design process were rooted in the fact that the firms are focusing too much on their own commercial interests rather than the outcomes they are delivering to consumers. Where we found problems we have taken action with the firms involved.

"This work is a further step towards intervening earlier in conduct regulation and demonstrates that the FSA is already seeking to identify potential consumer detriment at a far earlier stage."

This is the second piece of guidance the FSA has published focusing on product design. Yesterday, the FSA and OFT jointly published guidance for consultation aimed at firms that are developing, or planning to develop, protection products similar to payment protection insurance (PPI).

Notes for editors

  1. Guidance Consultation: Retail Product Development and Governance - Structured Products Review. The consultation period for the proposed guidance will end on 11 January 2011.
  2. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.

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