Following the collapse of the Lehman Brothers Group in September 2008, the FSA identified over 5,000 UK retail investors who had invested a total of £107m in structured investment products where the protection of their capital at maturity had been provided solely by firms within the Lehman’s Group (“Lehman-backed structured investment products”). As a result of the Group’s collapse, these retail investors may have lost some or all of their money.
Lehman’s collapse posed a great number of complex issues for us. Disentangling these and identifying a course of action which could potentially offer a solution to the detriment suffered by investors, as well as being a proportionate response in terms of the broader structured products marketplace, has been challenging and time-consuming. The complexity has been to a great extent created by the numbers of parties involved and accordingly much of our work has centred on finding where the culpability lies in the distribution and marketing chain: the role of marketing literature; the role of advisers; common practices in the wider marketplace, what due diligence could be expected from the plan manager in selecting Lehman as a counterparty; a number of legal issues which affect the disclosure of the credit provider in the marketing literature; and crucially, where compensation is potentially available.
Our immediate action was to review the plan managers’ marketing literature to determine if it complied with the FSA’s financial promotion rules, looking, in particular, at descriptions of market risk, credit risk, guarantees, and availability of the compensation scheme. We visited the firms to assess their systems and controls. As a result, we asked three of the firms to assess their financial position in relation to potential claims by investors in Lehman-backed structured investment products. Two of the firms, NDF Administration Limited and Defined Returns Limited went into administration on 14 October, and the third, Arc, on 26 October. Investors may be entitled to compensation from the FSCS. Fact sheets to assist them in the process have been published on the FSA’s consumer website:
http://www.moneymadeclear.org.uk/news/firm/2009/NDFA_DRL.html
http://www.moneymadeclear.org.uk/news/firm/2009/ACI.html
Throughout our work in this area, the FSA’s overriding priority has been to identify avenues for redress for the largest number of affected investors where appropriate, and secondly, to identify, and mitigate, any ongoing risks to retail investors in the sale and marketing of structured investment products in the wider marketplace. We agreed in May to report the findings of our work in October.
Suitability of advice
We carried out a thematic review of the suitability of advice given to customers who had invested in Lehman-backed structured investment products with a sample of firms. We found significant levels of unsuitable advice and substantial systems and controls failings in nine of the eleven advisory firms assessed. As a result, three firms have been referred to our Enforcement Division for investigation and a further seven firms will be undertaking past business reviews. The report of our findings confirms our standards for suitability of advice and sets out our expectations here in respect of all structured investment products, not just those which were backed by Lehman Brothers. We expect all firms advising customers in this area to take note of our findings and to take action as necessary. We will undertake follow-up assessments to firms in the course of 2010 to ensure that they meet our standards and expectations.
Quality of advice on structured investment products [PDF]
Structured investments products – suitability of advice assessment template
We have published a suitability assessment template and accompanying explanatory note for advisory firms to use when handling complaints on structured investment products. This can also form part of their compliance monitoring. We have written to all firms that gave advice on Lehman-backed products to inform them of our findings and to ask them to use the suitability assessment template when handling complaints on Lehman-backed products. We expect firms to handle any complaints fairly in accordance with our rules in the Dispute Resolution sourcebook (’DISP’), and pay consumers redress if they identify failings in their advice process.
In order to use the template you will need to save it to a local file and rename it. When the dialogue box opens asking you whether you want to open or save it please open the file then save to a local file as a renamed file. You will then be able to use it to record your information.
Structured Investment Products Suitability Assessment Template - Excel [XLS]
Structured Investment Products Suitability Assessment Template [PDF]
Structured Investment Products Suitability Assessment Template - Explanatory Note [PDF]
We have also published a series of frequently asked questions (FAQs) to provide further clarification to firms on the status of the template and explanatory note and some of the key FSA expectations they incorporate.
Structured Investment Products Suitability Assessment Template - FAQs [PDF]
Standards in the wider marketplace
We have carried out a thematic review of a representative sample of the marketing literature of structured investment products which were not backed by Lehman Brothers to determine firstly: whether current practice is fair, clear and not misleading, and secondly: to compare current standards with those in literature produced immediately before the Lehman collapse. We found failings in many current financial promotions and many plan providers failed to describe the key risks fully and effectively in their marketing material. We are taking appropriate regulatory action to address these failings with the firms concerned. We expect all other firms to ensure their marketing material meets our regulatory standards and we will continue to review the wider market closely.
Fair, clear and not misleading – review of the quality of financial promotions in the structured investment products marketplace [PDF]
Product design and distribution
We have assessed the risks to consumers involved in the product design process and the degree of due diligence we expect product providers to carry out in the design, development and distribution of products as well as post-sales responsibilities. We have re-stated our expectations of firms in these areas based on our Regulatory Guide ‘Responsibilities of providers and distributors for the fair treatment of customers’ (http://fsahandbook.info/FSA/extra/4720.pdf). Our report: ‘Treating customers fairly - structured investment products’ includes a reminder on two technical issues concerning the structure and categorisation of retail structured investment products.
Treating customers fairly – structured investment products [PDF]
Retail Product Development and Governance - Structured Products Review
Press release
Thematic review of structured deposits
