The UK Financial Conduct Authority (FCA) published recently the details (here) of an enforcement case involving Credit Suisse International (CSI) and Yorkshire Building Society (YBS). They were fined for failing to meet the requirement that financial promotions are ‘clear, fair and not misleading’ £2m and £1.4m respectively.
Not much new so far but the circumstances of the case indicate how financial services are evolving and the challenges for risks management.
The case involves a structured product providing capital protection, a guaranteed minimum return and the potential for achieving a higher return under certain conditions related to the performance of FTSE100 index. CSI manufactured the product and YBS distributed (most of) it. The product raised nearly £800m and reached 84 thousand customers.
At the heart of this case there is a concern that product complexity can reach a level such that it is difficult to ensure that disclosures to retail customers are clear, fair and not misleading. For example, the FCA was concerned that the disclosures suggested that this was a simple index tracker – it wasn’t. This can distort customers’ ability to infer the likelihood of a maximum return.
In addition, there are five interesting points to take away from this case:
1. Distribution arrangements give rise to significant conduct risk, even if no financial advice is provided.
2. The chances of relevant events need to be taken into account in financial promotions. A ‘maximum return’ that can be achieved with nearly zero probability based on past history is not really a ‘maximum return’!
3. Third party consumer advocates can have an impact. The UK Consumers Association (‘Which?’) approached YBS and CSI in September 2010 with concerns about financial promotions and the chance of achieving the maximum return advertised. This resulted in limited changes to disclosures: more emphasis on the conditions required to achieve the maximum return and less emphasis on the presentation of the maximum return.
4. The target consumer group has practical importance. The disclosures will be crucial to ensure appropriate consumer outcomes if you are targeting ‘stepping stone customers’, ‘typically conservative, risk averse customers’, with a structured product and don’t offer advice.
5. Slow reaction to regulatory developments persists. The relevant period when the breach took place stretches to 30 months from November 2009 to June 2012. The earlier intervention by ‘Which?’ and concerns raised by the FCA had limited effect.
It is interesting to see all these different factors coming together in a case. This may be one of the few occasions (if not the first) where a fine results because financial promotions did not take into account the chances of the underlying events.
If you work in financial services, I would be keen to hear your thoughts about these lessons for the management of conduct risk. If you don’t, I would be keen to know if these lessons resonate with your experience.
* Thanks to my colleagues for suggesting a title.
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