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U.K. Banks Must Test Retail Structured Products for Fairness

March 23 (Bloomberg) -- Firms must stress-test structured financial products to make sure they are fair before selling them to retail customers, the U.K. Financial Services Authority said.

Banks should probe their structured products for design flaws and compare returns for customers against other investment types, Britain’s financial watchdog said in a report on its website today. Products should be designed “that meet the target audience’s needs, rather than merely contributing towards the firm’s bottom line.”

“While we recognize that they must operate on a commercially sound basis, firms should strike a balance with pricing and market pressures to ensure that fair consumer outcomes are delivered,” the regulator said in the report.

The FSA has increased pressure on banks to be transparent in their dealings with retail customers. Barclays Plc was fined 7.7 million pounds ($12.2 million) in January last year for failing to disclose risks in two funds it sold to thousands of retirees. The fine was the biggest imposed by the London-based regulator for retail rules breaches.

Structured products are fixed-term investments that have a return rate derived from a separate measure, such as a financial index or basket of shares.

The financial watchdog, funded by the firms it regulates, is preparing to be abolished by 2013 and replaced by two separate regulators to police banks and markets.

To contact the reporter on this story: Ben Moshinsky in London at bmoshinsky@bloomberg.net;

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net.

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