'Capital protected’ products fall under ASIC’s gaze

Financial advisers and product providers within the unlisted retail structured products space can expect closer examination of their activities after the Australian Securities and Investments Commission (ASIC) indicated it is conducting a review of many aspects of the sector. 

ASIC released two reports today on products that are promoted as having capital protection or a capital guarantee stating retail investors often had a poor understanding of these investments which were often confusing or misleading about the level of risk within the investments. 

According to ASIC there were 32,000 retail investors in unlisted retail structured products in 2012 with 56 per cent of those aged 55 years or older. At the same time about one quarter of investors accessed the products via a self managed super fund and about half of investors relying on financial advice before investing. 

ASIC said it had examined complaints related to capital protected or guaranteed products received from January 2010 to June 2011. It noted a number of complaints alleging inadequate consideration of the suitability of these products for their clients, in light of the clients’ inexperience in investing in complex structured products, their circumstances, their investment objectives, the affordability of the product and the client’s risk profiles. 

While ASIC flagged it was looking into the disclosure requirements for advisers it also mentioned that some of the advisers who had received complaints acted as representatives of the product providers and further surveillance or enforcement action would follow. 

ASIC also found problems with the naming and description of certain complex and risky structured products with some products containing knock-out clauses and performance hurdles that may lead to investor losses. 

It stated “there is clear evidence that consumers often have a poor understanding of the nature and risks of the structured products they invest in, and tend not to read and understand disclosure documents”. 

“Given the attraction of investments that offer to protect or guarantee investors’ capital while simultaneously offering yield there is a risk that they may be mis-sold,” ASIC Commissioner Peter Kell said. 

“ASIC will be focusing on the use of terms such as 'protected’ that create a perception of safety where this is actually inconsistent with the underlying risks of some of these products. Such claims can have a powerful influence on the decision of investors, and we expect product issuers and financial advisers to ensure claims are consistent with the features of these investments.”