ASIC’s new report highlights the complexity, and lack of retail investor understanding, of ‘capital protected’ and ‘capital guaranteed’ products, and ASIC’s concerns about confusing and potentially misleading messages that may be being conveyed to retail investors about the level of risk involved. Given ASIC’s focus on ensuring that investors can make informed decisions about these products, product issuers and financial advisers should take particular care to ensure any advertising is consistent with the features of the products, and that any advice appropriately addresses the risks associated with the products.
ASIC has released a health check of the Australian market for unlisted, retail structured products promoted as having ‘capital protection’ or a ‘capital guarantee’. Key points arising from Report 340 ‘Capital protected’ and ‘capital guaranteed’ retail structured products (REP 340) and Report 341 Retail investor research into structured ‘capital protected’ and ‘capital guaranteed’ investments (REP 341) include that:
- retail investors have a poor understanding of capital protected or capital guaranteed products; and
- sellers of these products need to ensure that marketing and advice directed at retail investors is accurate.
REP 340 highlights that the way some of these products are labelled can convey confusing or potentially misleading messages about the level of risk that investors are exposed to. In particular, ASIC has indicated that it will focus on the use of terms such as ‘protected’ that create a perception of safety which is actually inconsistent with the underlying risks of some products, and is particularly concerned about potentially misleading or unhelpful claims of “conditional protection”.
Similar concerns about retail structured products have also been raised by overseas regulators. The International Organization of Securities Commissions (IOSCO) has released a consultation report entitled Regulation of Structured Products which discusses the difficulties these products pose for investor protection and proposes a ‘regulatory toolkit’ for IOSCO members, covering potential regulation around product design and issuance, disclosure and marketing, product distribution and post-sale practices.
The closing dates for comments on the IOSCO report is 13 June 2013.