Watchdog warns of 'confusing' investments

Structured products need to be more transparent, says FSA.

The Financial Services Authority this week hit out at investments that offer confusing guarantees and complex structures. The City watchdog warned that the way investments known as "structured products" are marketed could lead to widespread mis-selling.

Nausicaa Delfas, the FSA's head of conduct supervision, said: "Structured products are rising in popularity in today's low interest rate environment." She said that the watchdog was "concerned that the growing number of structured products, as well as increasing product complexity, is placing a strain on firms' systems and controls".

Delfas warned that the strain could "increase the risk of poorly-designed products and lead to mis-selling", and accused firms of "focusing too much on their own commercial interests, rather than the outcomes they are delivering to consumers".

The problems centre around the use of the word "guaranteed" in relation to the investments. Many offer guaranteed returns of capital, for instance, plus the potential for further returns linked to the stock market.

However, unwary investors could mistakenly believe that the guarantee refers to the stock market-related returns, which they may not get.

Structured investments use investors' cash in a variety of ways, but they are often too complex for buyers to understand.

Firms have, in the past, been fined for mis-selling the products, Lloyds TSB being the most high-profile of these. In 2003 it was fined £1.9m for mis-selling Scottish Widows bonds. The FSA has not ruled out the possibility of further fines.

Meanwhile, the Financial Services Compensation Scheme has warned that investors may not be able to use the fund if their structured products investments do not provide the expected returns. The only way they may be able to claim compensation is if marketing literature is proven to be misleading. This warning highlights the importance of understanding the risks involved.

Adrian Lowcock, senior investment adviser at Bestinvest, said: "I am not a big fan of structured products, although they have their place. They are more complex and riskier than they appear, the charging structure is more complicated and opaque, with a lot of hidden charges, and ultimately they play on investors' fears, offering a guaranteed return and protection after markets have fallen.

"Using them in investment management is one thing, as the manager can continue to monitor them and sell out at the right time. Buying and holding them is not necessarily the best strategy, but that is often how they are presented to investors."

Lowcock says there should be more control over the marketing of structured products. "Stress testing new products and ensuring there is a monitoring process in place will help reduce the chances of a mis-selling scandal. Investors also need greater transparency on charges and how products are profitable to the business running them."

The FSA this week published guidance for companies offering structured products. It said providers should pre-test new products and monitor their progress throughout their lifecycles. If firms do not comply, there may be further crackdowns.

While firms debate the issue, investors should be wary of putting faith in structured products.