Posted: 13th August 2014

The £2.4m and £1.4m fines imposed on Credit Suisse and YBS respectively, highlights not just the importance of providing fair, clear and not misleading financial promotions but also some valuable reminders as to the importance of robust and ongoing product governance, particularly in terms of the manufacture v distributor relationship. It is the first time the regulator has taken action against both the manufacturer and distributor of a product simultaneously.

Credit Suisse International (CSI) designed and created the Cliquet product, a capital protected structured product which could be taken over four to six years. The product guaranteed a minimum return based on the performance of the FTSE 100 through a series of six month options based on the growth of the FTSE 100.

For the maximum return to be achieved, the FTSE 100 would need to steadily rise throughout the lifetime of the product. The Financial Conduct Authority (FCA) found that the chances of anyone receiving the maximum return were close to nil and found that the way in which the potential maximum return was promoted, was highly inappropriate given that both YBS and CSI knew it was highly unlikely that it could be achieved. The financial promotions lead to an unfair presentation of the likelihood of achieving the potential maximum return.

Breaches to the financial promotions rules aside, there are important lessons in here for firms relating to product governance, for example:

  • Best practice in relation to product development and product governance requires firms to identify their target market and design products that meet the target audience’s needs. According to the Final Notice, the Cliquet product was marketed to unsophisticated and inexperienced investors and was sold on a non-advice basis
  • Firms are also required to stress test new products to ensure they are capable of delivering fair outcomes for the target audience and to monitor the progress of a product through to the end of its life-cycle. We would advocate post sale testing of financial promotions to provide valuable insight as to the level of understanding by customers.
  • Where a manufacturer v distributor relationship exists and, in cases such as this where there are multiple distributors, firms should obtain ongoing management information and ask themselves the question, do you know how the volume of your sales and the demographics of the population of customers, compares with other distributors?

Both fines are a timely reminder of the importance the FCA places on robust product governance at design, sale and throughout the product lifecycle. Firms and stakeholders within firms interested in this area should remind themselves of the best regulatory guidance for product governance, found in the FSA’s Finalised Guidance – Retail Product Development and Governance – Structured Product Review, March 2012.


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