Sir Howard Davies, the outgoing chairman of the Financial Services Authority, yesterday warned that many companies are selling obviously inappropriate products to consumers who do not understand the risks involved.
Sir Howard indicated there was a range of products which so far have escaped close scrutiny but which might join pensions, endowments and split-capital investment trusts as debacles that the financial services industry might have to compensate customers for.
Using his final appearance in charge of the FSA's annual meeting, Sir Howard said: "The biggest disappointment of my time at the FSA has been the failure of firms, and particularly senior management, to learn the lessons of past mis-selling. Again and again we find examples of high-street firms disregarding the suitability requirements in our rule book."
So-called "precipice bonds", a complex leveraged product, are an example of risky investments that had been mis-sold in some cases, Sir Howard said.
"Companies structured a highly leveraged investment in the stock market and in some cases sold them to people where it is very difficult to see it was suitable for them. Some people who bought them had never had an equity investment before," Sir Howard said.
The FSA refused to elaborate on other products it is concerned about, but another area where mis-selling claims are expected to become rife is mortgage equity withdrawal schemes. The schemes have soared in popularity as older people seek to release cash from their homes but, critics say, customers do not always realise how much of the value of their homes they are signing over to banks and other lenders.
Sir Howard also raised concerns about planned government changes to the regulatory environment that would see a range of low-cost and simple products sold to customers with almost no advice in order to encourage more people on lower incomes to save. He said of the products, which are being devised following Ron Sandler's review of the savings industry last year: "I am not opposed in principle to ways of simplifying the regulatory environment. But is it possible to devise a pension or with-profit product this is unmis-sellable?"
Sir Howard, who steps down in September to become director of the London School of Economics, confirmed that the regulator had widened its investigation into the implosion of the split-cap sector.
The FSA has taken a number of individuals, as well as fund management companies and brokers, into the net of parties it is scrutinising over whether a "magic circle" of fund managers colluded to artificially prop up share prices of split-caps with cross-holdings.
Sir Howard refused to say how many firms the FSA is now investigating, in what has become its largest-scale inquiry into possible market abuse. However, the FSA has been listening to tapes of conversations in dealing rooms and wading through documents to see whether there was evidence that a group of fund managers and brokers deliberately manipulated share prices.
The watchdog said it wanted to introduce new regulations in September for investment trusts, which would limit the level of cross-holdings all investment trusts could hold and which would boost the amount of information available to ordinary shareholders.
PRECIPICE BONDS The name given by critics to these "protected" bonds describes what happens when things go wrong. Precipice bonds pay out a fixed amount of yearly income, but only return the initial capital investment if the stock market stays above a certain level. If the market falls below that level, the customer can lose cash for every percentage point fall in the index. As stock market conditions became tougher some product providers geared the bonds up and wiped as much as 5 per cent off an individual's capital for every 1 per cent drop in the index. As those bonds mature, some customers are finding they have lost half or more of their capital on what was supposed to be a low-risk investment.
MORTGAGE EQUITY RELEASE Customers can raise cash on the value of their homes by borrowing, say, 25 per cent of its value without having to pay the sum back immediately. But they must pay back the original amount when the property is eventually sold plus a share of any increase in the property's value. The problem lies in the amount of the increase in value that some product providers have been asking for. Critics say many customers do not understand how big the repayments are from the schemes, leading to potential legal wrangles.Reuse content