The Australian Securities and Investments Commission (ASIC) yesterday released Report 340: ‘‘Capital protected’ and ‘capital guaranteed’ retail structured products’, which is based on a ‘health check’ of the market conducted in 2012.
ASIC is concerned that some of the products are labelled with “confusing or potentially misleading” messages likely to lead consumers to believe they have no chance of losing their capital.
According to the report, ASIC has written to a “number of issuers” about the issue, “resulting in amended promotional materials”.
“Where we see future instances of inappropriate or potentially misleading or deceptive promotional material, we will take strong action,” said the report.
Zenith senior investment analyst Dugald Higgins said it was “understandable” that ASIC was concerned about the marketing of these types of products, given their complexity.
“I don’t think any of the issuers have ever been technically misleading, but sometimes it is overly complex for the average person on the street to be able to understand all of the technical ramifications,” Mr Higgins said.
According to ASIC, structured products offering ‘capital protection’ are typically made up of a ‘safe’ asset such as a bond and a ‘risky’ asset like a derivative investment. The ‘safe’ asset provides the ‘guaranteed’ capital, and the ‘risky’ asset exists to provide returns in line with the stock market.
But some capital protected products contain performance hurdles and knock-out clauses that can result in investor losses, according to ASIC. The report also raises concerns about some ‘internally geared’ structured products.
According to the report, the number of complaints against product issuers of ‘capital protected’ products to the Financial Ombudsman Service is rising, “with some complaints being lodged by investors who are represented by the adviser that recommended the product”.
ASIC Commissioner Peter Kell said his organisation was particularly concerned about “misleading or unhelpful” claims about ‘conditional protection’ – a concern that has also been raised by overseas regulators.
“We expect product issuers and financial advisers to ensure claims are consistent with the feature of these investors, so investors can make informed decisions,” Mr Kell said.
For Mr Higgins, ASIC’s efforts to provide clear and consistent disclosure around every asset class is laudable – but consumers often lack the financial knowhow to interpret the disclosure.
“That’s why you really need specialist third party advice on these things, so you make sure that you do understand all of the ins and outs,” he said.
