Wheatley Says Structured Products Like Spread Bets ‘on Steroids’

Structured products are a “perfect example” of securities where banks have overloaded investors with information without ensuring they understand the risks, according to the head of a new U.K. regulator.

The products, which typically package debt with derivatives, have “often been mind-bogglingly complicated financial gambles,” according to Martin Wheatley, chief executive of the Financial Conduct Authority. They are “almost like spread bets on steroids,” he said in a speech yesterday.

Regulators in the U.S. and Europe are seeking to increase transparency for the securities after they came under scrutiny following the financial crisis in 2008 for being overly complex. Rules requiring banks in the European Union to provide concise information outlining the characteristics and risks of the products they sell could be in place by the end of 2014, according to the European Commission.

The Financial Services Authority was replaced last week by two new regulators. The FCA was created to carry out the FSA’s consumer work and has powers to quickly ban risky products, intervene in marketing and publish information on investigations before they result in charges or a settlement. The Prudential Regulation Authority, a unit of the Bank of England under incoming Governor Mark Carney, is responsible for the stability of the banking industry.

Many structured products are too complex with too many moving parts, which means they are “almost impossible to take a rational decision on,” Wheatley said.

He highlighted a so-called auto-callable structured note where investors lock up money for between one and six years with their returns dependent on the share prices of three technology companies, as an example of a complex product.

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