Lowes: FOS figures highlight structured product changes

8 August 2012 | By Ian Lowes

Contrary to popular belief we advise across a wide range of investments and most of our investment business is not into structured products but into funds. However, being an active commentator on the structured product market it’s no surprise that I’m going to talk about them again today.

The latest quarterly consumer complaints statistics from the Financial Ombudsman Service show that issues in respect of structured capital-at-risk products have reduced dramatically over the past few years.

Full year figures to March 2010 show there were 273 complaints received about structured capital-at-risk products. This figure went up to 550 in the following year and in the year to March 2012, 139 were received. For the period April to June 2012, fewer than 33 complaints were received (FOS does not give specific figures for any number lower than that).

While it is impossible to accurately define the exact causes of such a decrease in the number of complaints, it is nevertheless a useful exercise to explore some of the possible contributory reasons.

The higher figures in the period 2009-2011 can perhaps to a large part be explained by the collapse of Lehman Brothers and the subsequent failure of some of the smaller plan managers and distributors which left some investors looking to recover their losses.

It is possible that now the effects of these events have worked their way through the Ombudsman system the level of complaints has attained a more natural level. Additionally or alternatively, it may well be the case that the literature is now much more clear and advisers have been able to more effectively communicate the potential investment outcomes to their clients to the extent that there have been no nasty surprises to give rise to complaints.

The past few years have also seen many providers and independent commentators produce good quality educational material and deliver it to the market either through online guides, annually produced brochures, face-to-face training sessions or conferences and seminars as well as writing regularly for the press. Through StructuredProductReview.com, the structured product comparison website we built for IFAs, we have also looked to improve the level of knowledge about the sector and the site houses an extensive and well used education section, including a range of articles written by key industry figures.

The defined terms of structured products mean that the investments can be easily undertood and appreciated by clients. By decreasing the misconceptions that are perpetuated about the market and increasing the level of knowledge of the sector, both advisers and their clients can be more confident that they understand the investments. This effort from both the providers and other independent sources makes for a more knowledgeable and transparent marketplace and it is not inconceivable that this would be reflected by a lower number of complaints.

Furthermore, I believe that an additional possible cause behind the reduction in the complaints figures is due to developments in the market that have come about partly as a result of the increased attention being given to structured products by the regulator.

Providers have responded promptly to the FSA’s papers, in some cases pre-empting its messages. For example, the term ‘guaranteed’ was almost entirely removed from the UK retail structured product market for those plans sold through IFAs (except in the case of NS&I products) before the FSA recommended the cessation of its use in marketing literature. Also, while counterparty risk has always been present, following the collapse of Lehman Brothers far more attention has been paid to this aspect of structured investments and gilt-backed, collateralised and multi-counterparty plans have been introduced to provide variety for investors for whom counterparty risk is of particular concern.

When dealt with constructively, complaints can be positive. They should always be taken seriously and I believe the overall response of the structured products market to the issues that have arisen in recent years shows that it is doing just that. As a result I am not surprised to see the FOS figures at the level they are today.

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^{Ian Lowes, managing director of Lowes Financial Management and founder of StructuredProductReview.com.}

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