Lehman-backed structured products

Lehman-backed structured products misselling in UK
last updated September 2009

http://www.widerimplications.info/case_studies/wi_13.html
Structured products are essentially investment vehicles which are linked to an index or an asset class for a fixed period of time (typically three to six years) and which use derivatives to provide a return based on the performance of the asset/index over the period, usually with a full or partial guarantee of a return of capital at maturity. In the UK, they may take many different forms and structures, each of which will have different regulatory implications under the FSA's regime. Over recent years the market for these products in the UK and globally has grown considerably.

With guaranteed versions, these products offer a floor to any downside investment risk along with capped participation in stockmarket returns. The guaranteed element is generally provided by a third party and the risk of that third party not meeting its obligations is the credit risk.

At the time of the Lehman Brothers collapse in September 2008, it transpired that a considerable number of UK investors had taken out plans where either a full or partial guarantee had been provided by Lehman's.

The FSA’s response has been to conduct a review of the marketing literature for Lehman-backed structured products. This is now complete and the FSA is in the process of evaluating the findings. A further priority, which it aims to conclude as quickly as possible, is to prepare for an assessment of the quality of advice for these products. Thirdly, it is conducting an analysis of the wider market for structured products in the UK which will feed into the overall review.

In the aftermath of the Lehman's default, the Financial Ombudsman Service has received a number of complaints from investors and other parties involved in the sale of linked products. It has been investigating some cases, but the number of these is comparatively small in relation to the total numbers affected.

In the course of the regular liaison between the FSA and the ombudsman service, we agreed that implementing the Wider Implications process may have greater potential to remedy any consumer detriment, as well as potentially being able to deal with the concerns of more consumers than those who have referred cases to the ombudsman service.

Accordingly, the FSA wrote to the ombudsman service on 6 May 2009 asking it to consider deferring issuing any adjudicator views or ombudsman decisions in these cases. The FSA said it believed that this would allow it to explore all options to achieve the best outcome for consumers even though this might give rise to some delays in individual cases.

The ombudsman service responded on 7 May 2009, welcoming the prospect of a regulatory solution to these issues. It agreed to defer issuing any adjudicator views or ombudsman decisions in these cases for the time being, and to notify affected complainants and financial firms accordingly. The ombudsman service said that it would review the position in three months – in the light of progress by the FSA towards a regulatory solution.

On 13 August 2009 the FSA asked the ombudsman service to consider a further deferral, to give the FSA more time to progress its work with the aim of reaching the best possible outcome for all affected consumers. On the basis of the information available to it, the FSA believed that it would not be in the interests of affected consumers for the ombudsman service to press ahead with individual decisions. The ombudsman service responded that, in the light of this, it would defer issuing decisions - and would review the position in three months."

On 11 September 2009 the FSA told the ombudsman service that FSA had now completed enough of its work to conclude that regulatory action could take place alongside case-by-case adjudications without prejudicing consumers, and it now had no objection to the ombudsman service proceeding towards issuing decisions in the individual cases that had been referred to it. The ombudsman service is proceeding accordingly.

HKSFC and Legco should also study these :

FSA Wider Implications - Structured Products Sep 2009


http://www.fsa.gov.uk/pubs/other/fp_structured_review.pdf

FSA Expectations on Quality of Advice for Structured Products Oct 2009

http://www.fsa.gov.uk/pubs/other/qa_structured.pdf

FSA Expectations of Plan Managers Oct 2009

http://www.fsa.gov.uk/pubs/other/tcf_structured.pdf

FSA Review of Marketing Materials for Structured Products Oct 2009

http://www.fsa.gov.uk/pubs/other/fp_structured_review.pdf

Westminster Hall debate on Structured Products Marketing (easy read version)

http://www.theyworkforyou.com/whall/?id=2009-07-07b.239.0