FCA publishes good and bad practices in complex ETP sales

The FCA has published some examples of good practice and areas for improvement within firms that sell complex ETPs to retail consumers.  These are, broadly, exchange traded funds, commodities and notes, but can now also include crypto ETNs after the recent lifting of the ban on selling these products to retail customers.

The FCA looked particularly at how firms evaluate the products, communicate key risks to customers and monitor outcomes under the Consumer Duty.  It says that retail consumers are increasingly able to access these products, often using an app or non-advised platform, so it is critical that firms make sure the customers fully understand the products so they can make informed decisions.

Generally, it found some firms had detailed processes, but others did not do enough to assess the customer’s experience or knowledge, and disclosures were sometimes not clear.

Its main concerns were that:

• some firms lack appropriate market assessments and distribution controls, which mean that consumers outside the intended target market may have access to products that might not meet their needs – others though do clearly set out who would not be in the target market and proactively restrict access for them;
• firms that test customer knowledge based on the relationship manager’s understanding are more likely to reach wrong conclusions or inconsistent outcomes than those that use binary questioning as a direct appropriateness test;
• many firms did not show a good understanding of their role as distributors when making fair value assessments, including some that either didn’t consider manufacturers’ assessments at all, or placed weight on manufacturer information but didn’t analyse it alongside their costs as distributor;
• to test consumer understanding, the FCA likes clear, plain language warnings with appropriate alerts during the consumer journey, and proactive check-ins for customers holding ETPs beyond recommended periods. It does not support solely relying on manufacturer KIDs; and
• the fact that 82% of customers held their trades for longer than the manufacturer’s recommended period suggests that monitoring is not picking up whether customers intend to do this. Firms should take proactive measures to check whether customers intend to do this and offer tailored services to vulnerable customers;
• monitoring was generally at a service level, and did not particularly focus on complex ETPs.

The FCA has reminded firms of DP25/3 and asked them to be sure to engage with it.