Mark Gibbon

Managaing Director, Collegiate Group

The recent FSA guidance raises some potentially far reaching issues for the IFA industry. Clearly there will be a debate on the reasonableness of the FSA producing this detailed guidance as to what the appropriate standards are that the profession ought to have applied. Surely there should have been proper consultation with the profession as to what the relevant professional standards actually were at the time. What is, however, clear is that the FSA have now set down a marker for advisers as to what they consider the standards are going forward and this is an area that the profession needs to look at very closely and see its relevance beyond structured products.

Where capacity for loss is being reviewed then the FSA have said they will assume that where less than 10% of the portfolio is invested in the product they assume the investment is within the customer’s capacity for loss. If more is invested then the situation needs to be considered more carefully as to whether the proportion invested was reasonable or a reasonable justification has been made.

On the face of it the concentration argument is not limited to structured investments but applies to all products. Given the failure of Lehmans was very unlikely before the credit crunch how many other product/product providers are vulnerable to very unlikely events. It is hard to think of any product that does not have some vulnerability to a very unlikely event.

The Industry needs to have an urgent debate to determine if it is to accept that you need a good reason to invest more than 10% in one product unless a ‘good reason’ includes the cost/hassle of diversification is not appropriate to avoid the very low risk of a catastrophic event.

It is worth noting that the FSA have said that where the structured product is purchased in the customer’s name only, the value of jointly held investments should be halved and that the value of pension policies should not be included unless the investment is in the pension policy. These are both issues that should be included in any industry wide debate on the guidance issue by the FSA.