Monday November 21, 2011 at 12:00
The Joint Associations Committee (JAC) on Structured Products will continue engaging with the regulator following a meeting with the UK Financial Services Authority last week to discuss the Retail Product Development and Governance - Structured Products consultation, which will run until 12 January.
Whether we respond formally or not to the consultation we will definitely continue engaging the FSA on this topic, JAC chairman Tim Hailes told SRP. We discussed the three major items on the agenda (MiFID reform, Prospectus Directive changes and product governance), and we asked the UK regulator how their work plays out with European regulatory developments and what the philosophising actually means in practical terms around stress testing, life cycle performance of products, etc.
Hailes said there is clearly more thinking to do in relation to proposed product intervention rules and the detail of how products are sourced, structured and then packaged for retail distributors: I don't think the regulator had properly thought through some of the answers to our questions about practicalities at the coal face - but we value the dialogue and opportunity to exchange views, he said.
Hailes said there is still clearly a 'Lehman-type concern', as FSA signalled that significant changes in the credit rating of the issuer were important to communicate on an ongoing basis in relation to the product life cycle commentary. He said the industry explained that the performance of defined return structured products is tied to market movements which, by definition, cannot be predicted: We made a point that a lot of structured products are binary, he said. They pay something or other at a future point in time based on the formula and whether it generates a return is really a consequence of market developments after the point of launch.-áThe basic distinction between many structured products and actively managed mutual funds is that the former do exactly what they say they are going to do on the tin, and it is no more complex than that. The tin should obviously be clearly labelled in terms of explaining the 'what'.
The JAC questioned how the proposed new rules would be applied to product manufacturers described as a firm engaging in a particular activity rather than as a particular entity in the value chain: We specifically said that there are occasions when issuers are not the product manufacturers, for example, when they are in a competitive tender dialogue with a private bank. In that sort of situation it is often the private bank that has 'manufactured' the product idea for its customers and basically wants to use price competition to source a platform or product provider. The issuer is not originator or manufacturer of the product in those sorts of scenarios, he said.-á The theme of regulating the substantive activity undertaken as opposed to attaching labels to particular entities lies at the heart of the original work of the JAC and the two sets of Principles.
In relation to cross-border sales, the FSA said product governance rules will apply to UK-regulated legal entities involved in sales to other jurisdictions, ie extra-territorially. The UK regulator said, however, that it would take on board some of the comments made by the JAC on the potential for 'competitive disadvantage' and that would be factored into the ongoing dialogue with ESMA and the wider European regulatory reform discussion.
This is a start of a dialogue and I think we will be discussing these things again in considerable detail as the consultation evolves, said Hailes. We will continue raising these questions at a very practical level and we will see how that shapes the outcome.