Financial Regulator Faces Pressure to Halt Sale of "Toxic" Investment Products

Strategic Insights -

The Financial Services Authority (FSA) is being urged to take a tougher stance on the sale of certain investment products, including split capital investment trusts and precipice bonds, which have been linked to significant financial losses for investors. Consumer representatives, including Ann Foster, chairman of the Financial Services Consumer Panel, and Walter Merricks, chief ombudsman at the Financial Ombudsman Service, are criticizing the FSA for not doing enough to regulate these products. They argue that some of these products are inherently "toxic" and should not be sold to investors.

Key Takeaways:

  • The Financial Services Consumer Panel has called on the FSA to adopt a tougher approach to regulating the sale of products, particularly those that are deemed "toxic" and potentially mis-sold to investors.
  • Ann Foster, chairman of the Financial Services Consumer Panel, has criticized the FSA for accepting industry assurances too easily and not using mystery shoppers to check industry practice more effectively.
  • Walter Merricks, chief ombudsman at the Financial Ombudsman Service, has criticized the industry for devising products that dump all the risk on consumers and has called for simpler definitions of products and regulatory intervention to force firms to introduce a standard summary.
  • The FSA has previously acknowledged that products such as precipice bonds were mis-sold and has imposed fines on firms that have engaged in such practices.
  • Split capital trusts, which are investment trust companies with two or more classes of shares offering different types of return to private investors, were highly geared with complex crossholdings in each other and toppled like dominoes in 2001 after the stock market crash.
  • Consumer representatives are arguing that the FSA should make more use of mystery shoppers to check industry practice and catch potential mis-selling earlier.

Statistics:

  • £millions lost by investors in split capital trusts (no specific figure provided in the text)
  • 2001: the year in which split capital trusts toppled like dominoes after the stock market crash
  • Precipice bonds: a type of product that guarantees investors a high annual return but puts them at risk of losing some or all of their capital
  • Financial Ombudsman Service: the organization responsible for resolving complaints from consumers about financial services providers

Sources:

  • Financial Times (Ann Foster interview)
  • Speech to the Commons Treasury committee (Walter Merricks)
  • Financial Services Consumer Panel Annual Report (no specific date provided in the text)