FSA chief hits out at structured products

Financial Services Authority (FSA) chairman Callum McCarthy has warned of the dangers of banks selling complicated financial products to customers who do not fully understand them.

Speaking at a British Bankers Association conference in London this week, he said the FSA could not prevent such activity, but warned that it would use its powers of "rewarding those firms which behave responsibly" and of "making it increasingly costly for those who do not". He said the FSA would place "a new emphasis" on the problem.

"We have at present a customer who is too often not equipped to understand financial products, and whose judgement is therefore unreliable. And we have a sales force which too often has acted irresponsibly - and where that behaviour has historically been encouraged rather than discouraged by the incentives which their managers have used," said McCarthy.

In September, Lloyds TSB was fined £1.9 million by the FSA for mis-selling high-risk investment bonds called 'precipice bonds'. Lloyds subsequently paid out almost £100 million in compensation to customers that had lost money on the investments. Lloyds Treasury Services structured the product as a basket of put options with a barrier set against them. The effect was a down-and-in barrier product, with the investor selling put options for premium that funded relatively high coupon payments.

McCarthy warned banks to pay careful attention to ensure that customers fully understand the products they buy, that internal controls are put in place and that sales teams are rewarded for responsible behaviour.