The structured products industry in the UK has said it is alarmed at what it regards as sweeping and biased warnings about its activities from the national regulator.

Adair Turner, chairman of the Financial Services Authority, last week criticised “over-complicated product innovation”, mentioning structured products, over which the FSA has repeatedly raised concerns. He also, in a lecture at London’s Cass Business School, separately warned about the risks of a “shadow banking system” and the pressures on banks to sell risky products in a world of negative or very low real interest rates.

Turner’s comments, adding to those of the FSA in criticising the sale of wealth management products that it deems “unsuitable”, have drawn fire from the UK Structured Products Association.

“While any further explanation or qualification of these statements did not appear in the interview as it was reported, the UK SPA is very concerned that more sweeping and generalised comments are being made by the FSA, which fail to provide any balanced guidance to consumers, and risk causing more confusion,” Jamie Smith, SPA chairman, said in a statement.

“The suitability of any financial product for the consumer buying it is critically important, and like all sectors of the market, retail structured products must be used in appropriate and controlled ways. The ongoing dialogue between the FSA and the structured products industry has highlighted the improvements in controls and processes made in recent years, and analysis of consumer outcomes via complaints data indicates very little dissatisfaction,” he said.

Smith continued: “It is therefore disappointing that broad-brush statements about 'over-complicated' products are still being attached to an entire investment class – one which continues to offer simple and transparent solutions to ordinary consumer needs.”

“The overall costs of structured products should be communicated clearly to consumers, and compare favourably with traditional managed funds where total expense ratios of between 1.5 and 3 per cent per annum are common,” he said.

Risks and fines

The issue of whether wealth management clients are being sold inappropriate products has emerged as a major concern for the FSA. Last year, the watchdog slapped fines on several firms, such as Barclays, Credit Suisse and Towry, for financial shortcomings over product sales.

The structured products association suffered a blow during the 2008 financial crisis when Lehman Brothers, a firm heavily involved in many of these vehicles, went bankrupt. Lehmans’ demise underscored the importance to investors and advisors of understanding counterparty risk. The sector has also been criticised in the past for the opacity and complexity of such products and the lack of transparent pricing data.

This publication has argued that the FSA may run the risk of over-protecting consumers by stamping on any product that appears risky. To view that editorial, click here.