The UK’s Financial Conduct Authority (FCA) has announced that it has fined a product manufacturer and a product distributor in relation to disclosures in respect of a structured products transaction. This action is consistent with the increased focus by the FCA and other regulators in Europe in relation to structured products, particularly those targeted at retail investors.
The FCA’s action related to a cliquet product (a series of forward start options) which provided capital protection and the potential for further returns depending upon the performance of the FTSE 100 Index. However, the FCA determined that the probability of an investor receiving the minimum return was 40% to 50%, and the probability of receiving the maximum possible return was close to zero. Notwithstanding this, promotional materials prepared by both the product manufacturer and the distributor highlighted the potential maximum return as a key promotional feature. The FCA also noted that some of the materials did not clearly explain how returns were calculated.
The FCA noted that the product was typically sold to unsophisticated, risk-averse investors with limited experience and knowledge of financial products. The FCA stated that it is crucial that firms consider the needs of their customers during both the design and the marketing and sale of the product. The FCA also noted that financial promotions are often the primary source of information for consumers and that, in this case, the manufacturer and the distributor had failed to ensure that the disclosures were clear, fair, and not misleading.
The whole area of disclosure in respect of retail structured products is one that has been the subject of intense debate in EU recently, with the finalization in April 2014 of the text of the Regulation on key information documents for packaged retail investment and insurance based investment products (PRIIPS), which will require the publication of a short form key information document (KID) to investors prior to the sale to them of packaged retail investment products. The action of the FCA described above is a reminder that regulators are already very focused on disclosures in respect of these products and are likely to maintain a highly interventionist approach in this area.