Compensation for structured product victims
Investors who were mis-sold Lehman Brothers-backed structured products should be compensated, the financial regulator has said.
More than 5,600 people in the UK are thought to have lost about £107 million by investing in Lehman-backed structured products. Despite promises that these products were 100% safe, the collapse of Lehman Brothers means they are now virtually worthless.
The Financial Services Authority (FSA) says investors who received unsuitable advice or misleading promotional material should be helped and potentially offered compensation.
This follows the regulator’s review of the marketing and distribution of structured products, particularly those backed by Lehman Brothers, which revealed “significant advice failings” on Lehman-backed products in most of the financial advice firms sampled. It also found “serious deficiencies” in the marketing literature provided by a number of the plan managers selling these products.
As a result, the FSA says investors who bought Lehman-backed structured products through NDF Administration, Defined Returns Limited and Arc Capital and Income – all three of which have now gone into administration - may be entitled to compensation from the Financial Services Compensation Scheme. The firms’ administrators will contact investors with information on how this affects them.
The FSA is also writing to other investors with advice on what steps they can take if they believe they were misled by product literature or received unsuitable advice.
Three unnamed advice firms will also be subject to enforcement action for giving unsuitable advice.
Across the wider structured product market, the FSA says sellers must examine how they have sold these products in the past and, if necessary, to review past sales and provide investor redress where appropriate.
"We are committed to ensuring that retail financial services markets deliver fair outcomes for consumers,” says Dan Waters, director of conduct risk at the FSA.”
Investment companies have welcomed the announcement. Richard Saunders, chief executive of the Investment Management Association, which previously called for structured products to be subject to the same disclosure as other investment products, says: “It is really important that the nature of the investment, its risks and its costs are made clear to potential investors."
But consumer body Which? calls on the FSA to name and shame firms that are giving unsuitable advice.
“Product providers used words such as ‘safe’, ‘secure’ and ‘guaranteed’ to describe products which were anything but,” says Dominic Lindley, personal finance campaigner at Which?.
Structured products offer returns based on the performance of underlying investments. Many products are linked to a stockmarket index such as the FTSE 100 or a “basket” of shares. There are generally two types of product, one offers income, the other growth and investors have to commit their capital for the prescribed term, usually three or five years. The investment is not guaranteed and if the index or basket of shares does not perform as expected over the term the investor might not get back all their capital.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.