Offshore Capitalist

Advice failings revealed in Lehman structured products probe

Background: when Lehman Brothers failed, private investors around the world reeled in shock to discover that structured products backed by the bank were effectively worthless.

During the financial crisis, structured products have proved hugely popular with risk-averse investors or those wanting a higher income. They are typically linked to stock market indices such as the FTSE100 or a basket of shares, and guarantee high levels of capital protection.

Structured products can play an important role in many investment portfolios – as they can help diversify a portfolio and reduce downside risk.

However, while the premise of structured products is relatively simple, the products can be complex and difficult to understand.  Good advice is essential. Since the Lehman Brothers failure, investigations have shown that many advisors failed their clients by not highlighting ‘counterparty risk’ and the suitability of structured products within the client portfolio.

Regulatory bodies such the MAS in Singapore have had a particularly busy time cleaning up the mess.  In the UK, the FSA is conducting a review and action is being taken against several advisors:

The FSA has referred three financial advice firms to its enforcement division after its review of Lehman-backed structured products revealed widespread failings on the advice given over the investments.

The FSA visited a sample of 11 firms that had advised on the investments and found that nine of those delivered ‘significant levels’ of unsuitable advice over them.

The regulator said that nine firms failed to ensure advisers had a good understanding of structured products, and did not consider the individual features of products and their suitability for different clients.

The FSA is launching a review of the whole structured products market following the review. It is writing to the largest sellers of structured products, asking them to examine how they have sold these products in the past.

Its review found that there were ‘serious deficiencies’ in the marketing literature provided by a number of plan managers selling Lehman-backed structured products.

‘Given the failings we have come across in the marketing and selling of these products, today we are setting out a package of robust measures to help those who have lost money,’ said Dan Waters, FSA director of conduct risk.

The FSA will also next year undertake follow-up assessments of advice firms.

via Advice failings revealed in Lehman structured products probe | Personal Investor | Citywire.

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