FSA Issues Guidance on Product Design

Jack Humphrey, Regulatory journalist
November 02, 2011 /

Following efforts with the Office of Fair Trading to prevent the problems associated with payment protection insurance from recurring in a new generation of products, the Financial Services Authority has introduced further guidance for firms when developing new structured products.

In a review conducted by the FSA on seven major providers of structured products responsible for approximately 50 percent of structured products in the UK retail market by volume and value, the regulator found that while there had been some improvements, weaknesses remain in the way firms are designing and approving structured products – increasing the risk to consumers.

Firms tended to focus on their own commercial interests rather than consumer needs, the FSA noted.

The review was conducted between November 2010 and May 2011.

Following this review, the FSA is publishing guidance that firms should consider when designing structured products and dealing with the after sales process.

Much of the guidance is also relevant to other retail products.

The review concluded that firms should identify the target audience and then design products that meet that audience’s needs; pre-test new products to ensure they are capable of delivering fair outcomes for the target audience; ensure a robust product approval process is in place for new products; and monitor the progress of a product throughout its life cycle.

Further and more detailed actions for firms are outlined with the publication. The guidance is open for consultation until January 11, 2012.

Nausicaa Delfas, FSA’s head of conduct supervision, said: “Structured products are rising in popularity in today’s low interest rate environment, and we are concerned that the growing number of structured products, as well as increasing product complexity, is placing a strain on firms’ systems and controls.

“We want firms to consider the issues we raise in this publication, compare their product governance to the guidance we set out and address any areas for improvement. A lack of robustness in a firms’ product development and marketing processes can increase the risk of poorly-designed products and lead to mis-selling.

“Many of the problems we found with the product design process were rooted in the fact that the firms are focusing too much on their own commercial interests rather than the outcomes they are delivering to consumers. Where we found problems we have taken action with the firms involved.

“This work is a further step towards intervening earlier in conduct regulation and demonstrates that the FSA is already seeking to identify potential consumer detriment at a far earlier stage.”

The consultation period for the proposed guidance will end on January 11, 2011.

 

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