Wider Range retail investment products
Briefing Note BN007/2005
23 June 2005
The FSA has today published a discussion paper (DP) "Wider Range Retail Products: Consumer Protection in a Rapidly Changing World". The DP considers the risks to the FSA's objectives of both existing and emerging new retail products, particularly those that carry significant investment risk.
The DP covers a broad range of products to include (what the FSA has termed) 'wider range' investment products that may exhibit high degrees of volatility, illiquidity or complexity and highlights the risks these products pose to the FSA's objectives and potential mitigating action.
Key Risks
- Retail consumers do not understand and regulated firms do not adequately manage the significantly changed risk characteristics of UCITS III as compared to UCITS I funds;
- Retail consumers may be confused by the different forms and distribution channels of wider range products, resulting in mis-buying or mis-selling;
- The different regulatory approaches applying to the marketability of different investment products means that some retail consumers may not, under the present regime, have sufficient access to investment products that have comparable economic characteristics, and may thereby suffer detriment.
Options
The DP investigates ways in which these risks could be mitigated, but in many cases EU law restricts the ability of any national regulator to take action. However, the European Commission is about to publish a Green Paper on investment funds which may provide an opportunity to look at European solutions. The following options should be seen in that context:
- No change to the status quo
The 'no change' option does not amount to doing nothing. The FSA is obliged to implement EU legislation and would continue to do so. However, it could decide that it is content with the outcome that the present regime as may foreseeably be amended, provides for consumers.
- Increase regulation
If it is considered that some changes to the present arrangements are necessary in order to meet the FSA's statutory objectives, one option would be to increase the marketing barrier, to restrict the marketability of retail investment products that are presently widely marketable. In short, this would involve treating more products in the same way as unregulated collective investment schemes presently are.
- A new regime
Alternatively, the FSA could pursue new approaches to deal with wider range products. One approach would be to distinguish between products so that wider range products could be distinct from those that are not wider range. Forming the distinction could in itself be helpful to consumers if they could be made aware of the broad natures of wider range and non-wider range products. Another approach could be to make use of enhanced disclosures to consumers to draw attention to the key additional risks to which they may be exposed.
The FSA could also consider applying additional consumer safeguards to wider range products. These safeguards could include: product regulation; conduct of business requirements; and investability / marketability criteria.
Another option for consideration is lifting the marketing restrictions from unregulated schemes, or some of them, but the paper highlights that were this to happen there would be considerable challenges in ensuring adequate levels of consumer protection. These protections could be disclosure based or could include the use of other safeguards. But it is unlikely that such protections could be developed for products originating outside the EEA (such as offshore hedge funds). In addition, the FSA also recognises that measures to liberalise the marketability of such products may increase the risk of mis-selling or mis-buying of those products for other consumers for whom they are not suitable.
The FSA is now inviting discussion and debate about the issues raised in the DP and, in particular, what areas, if any, warrant further exploration and potential mitigation, whether through rule making, supervisory action, or European or international initiatives.
Footnote
This Discussion Paper is published alongside another Paper, "Hedge Funds: A Discussion of Risks and Regulatory Engagement" which investigates more comprehensively the risks posed by the growth of hedge funds. A separate briefing note is available on this DP.
