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Structured Products Marketing

It is a pleasure to serve under your chairmanship, Mr. Cummings. I congratulate the hon. Member for Wantage (Mr. Vaizey) on securing the debate and thank him for his constructive approach to this important subject. I am sure that it is not just his constituents who are interested in this debate, but constituents of other hon. and right hon. Members. Structured products are essentially pre-packaged investments that use derivatives to offer investors exposure to the performance of an underlying asset or index. Typically, they offer a full or partial capital guarantee from a third party that the investor will get at least their original investment back, although inflation would mean that it was less in real terms. The majority of the investment is usually used to issue a bond, providing the capital guarantee element, while the rest is used to generate an additional return in the form of an option. Typically, investment banks are the third-party issuers of the bonds and therefore the providers of the guarantee portion of the structured products. Following the collapse of Lehman Brothers Holdings in September 2008, the FSA identified 5,620 retail investors who had invested in structured products in which 100 per cent. of the guarantee of the return of their capital at maturity had been provided by Lehman Brothers. The investors had invested around £107 million in three products. The products were marketed by four plan managers, with 95 per cent. sold via some 800 intermediaries. The average investment was £14,500. Most products were sold during the second and third quarters of 2008 and their maturity dates are typically in 2013 and 2014. A stable and secure banking sector in which people have confidence is essential to the function of a modern economy. This is why the Government intervened to protect depositors and maintain a stable banking system. However, as I am sure hon. Members appreciate, it is not the Government's role to guarantee that investments always perform as well as investors hope. The Financial Services Compensation Scheme was established by the Government under the Financial Services and Markets Act 2000 as part of a system of financial services regulation that provides consumers with statutory protection. In particular, it protects investors who have incurred financial losses arising from regulated activities under the 2000 Act when firms regulated by the FSA, including authorised investment companies and financial advisers, are unable or are likely to be unable to pay claims against them. However, the FSCS does not cover claims arising solely from investment or market performance. The FSCS assesses the eligibility of each claim presented to it on a civil liability basis, in the light of the available information and on its own merits. FSCS pays compensation only when a claimant has suffered a financial loss. In the cases under discussion today, it has not been possible to establish a civil liability owed by the firm to retail claimants, as there was no direct relationship between Lehman Brothers and individual consumers. However, if it emerges that any of the plan managers have caused customers to suffer a financial loss and cannot meet their liabilities, the FSCS may be able to help, but only in circumstances in which the FSCS eligibility criteria are met—in particular, that a civil liability can be established. The Government have intervened to protect depositors, such as those who held their money in the Icelandic banks. However, parallels should not be drawn between depositors and those who invested in structured products with a guarantee backed by a third party, such as Lehman Brothers. The hon. Gentleman also asked about FSCS cover for structured products. That cover will depend on the nature of the structure that is used. The absence of compensation cover may constitute a key risk and that would therefore need to be disclosed. The hon. Gentleman asked about terms such as "guaranteed", "protected" and "secure" in advertising material. The FSA does not have any prescriptive rules or guidance on the use of such terms, but, at all times, firms must comply with their high-level duty to ensure that promotions are fair, clear and not misleading. Firms should consider the nature of any capital guarantee or protection and ensure that any reference to them is fair and accurate. In cases in which firms have to identify explicitly a third party guarantee, the information about the guarantee must include sufficient detail about the guarantor and the guarantee to enable the retail client to make a fair assessment of the guarantee. Under both EU and UK legislation, the FSA is responsible for the regulation of UK-based firms that provide investment products or services. As far as structured retail products are concerned, it has several responsibilities, including the regulation of firms that provide financial advice, which may be to buy such products and the assessment of the capital adequacy of firms that may provide the debt instruments that underpin structured products. It does not regulate retail structured products as a class of products as they may take many different forms and structures, each of which will have different regulatory implications under its regime. It is not part of the FSA's role under the 2000 Act to make comments on or assessments of the generic suitability of types of products for retail investors. However, it considers and enforces relevant disclosure and advice requirements arising from the EU prospectus directive and the markets in financial instruments directive, both of which have been fully implemented in our regulatory regime. As I said, marketing documentation provided to investors about such products must be clear, fair, and not misleading. I hope that the hon. Gentleman will be reassured by the fact that the FSA has been actively investigating the marketing of such structured products ever since the effects of the Lehman fallout became clear. At the end of 2008, the FSA initiated a programme to review the marketing literature of the plan managers who provided such products. The review looked at whether they had complied with the financial promotion rules when marketing their structured products. In particular it considered how the market risk is described—the risk of loss of capital protection—how credit risk is described and the risk that the guarantor cannot meet his obligations. It also looked at whether the description of any guarantees was fair and balanced; whether statements about the availability of compensation cover were fair and clear; and whether the plan managers took action to alert investors following the downgrade of Lehman Brothers in 2008. That initial review has been completed, and the FSA is now assessing the most appropriate course of action to take in the light of the findings, which will probably involve visiting intermediaries and investigating the advice that was given. The FSA's programme of work is extensive. In addition to the review of marketing literature relating to Lehman-backed products, the work also involves reviewing the structure, risks and quality of marketing disclosure in the wider marketplace. Furthermore, the FSA has put in place a thematic project to assess the quality of advice given by a sample of the 800 financial advisers who sold the products. In the light of the review, the Financial Ombudsman Service and the FSA jointly agreed to initiate the wider implications process, as that may have a greater chance of remedying any consumer detriment. It could also be able to deal with the concerns of more consumers' than those who have referred cases to the FOS. I shall speak in more detail about the process in a moment. I can assure hon. Members that the FSA is aware of the frustration of those who have made complaints and of my fellow hon. Members who have spoken on their behalf, but it is easy to see that much hangs on legal issues. Premature public statements could compromise any future FSA action on firms, or pre-empt its eventual assessment of risk in the market. However, as I have set out, the FSA is fully engaged with the issue, as it has been from the start. As hon. Members will understand, with our highly globalised financial system, the international element is crucial, so the FSA has been working with the Committee of European Securities Regulators on a taskforce to consider how structured products are distributed and sold to retail customers across Europe. Notwithstanding that the products are written for long durations, with most maturity dates in 2013 and 2014, and that most investors would not have expected immediate access to their money even in normal circumstances, the FSA will continue to focus on addressing the matter as quickly as possible. We expect a definitive resolution well in advance of the time when most of the investors would have expected their money back. The FOS and the FSA agreed to initiate the wider implications process on 7 May. That means that adjudications on complaints in relation to Lehman-backed structured products have been deferred to allow the FSA to investigate options for a regulatory solution that could reach a greater number of investors and address other issues arising from the sales of the products to retail customers. The process was designed to look at the implications of an issue rather than to assess the implications for individuals on a case-by-case basis. It provides a transparent means of bridging any regulatory gaps or resolving overlaps between the FSA, the FOS and the Office of Fair Trading on significant issues, particular those that could give rise to widespread consumer detriment. The independence of the FOS and the FSA is vital in their roles of providing a safety net for consumers with complaints against financial services firms. Their credibility, authority and value to consumers would be undermined if it were possible for the Government to intervene in their decision making. The FOS will review the position following an update from the FSA on 10 August 2009. The Government stand by the principle that investors should have access to transparent information about the risks involved in any investment, which is why we fully support the comprehensive work that is being done by the FSA and others. We certainly appreciate that such circumstances can cause a great deal of uncertainty and worry.