A behavioural economics research paper published today by the Financial Conduct Authority (FCA) has found that many consumers overestimate the expected returns on structured deposits.
Consumers were asked to anticipate how the FTSE 100 would grow over time and then asked for their expectations for structured deposits linked to the FTSE 100 during the same period. While consumers’ expectations for FTSE growth were in line with the FCA’s assumptions, they did not match the returns they anticipated on structured products based on the same benchmark. The FCA found that, on average, returns were overestimated significantly, by almost 10 percent of the assumed investment amount over five years.
The FCA also found that consumers did not recognise that the structured products designed for the purpose of the research were unlikely to offer greater returns compared to best-buy fixed-term cash deposits. Indeed, consumers needed to be offered relatively high rates of return on risk-free cash deposits for these products to be preferred to structured deposits. However, targeted disclosure somewhat improved how consumers make these comparisons.
The research findings reinforce the importance of firms designing structured products that are a reasonable match for the financial sophistication of customers in the target market. The FCA considered this as part of its assessment of how a sample of firms designed and manufactured structured products, which is also published today.
Tracey McDermott, director of supervision and authorisations at the FCA, said:
"There is a place for structured deposits in the market. But our research shows that many consumers find it difficult to understand how these work and compare them to alternatives. That is why it is crucial that firms ensure the way they design and market these products is driven by the needs of consumers. Our work indicated that this is not always the case.
"For consumers, the message is simple – think very carefully before buying a product if you don’t understand how it works and if you’re unsure, ask for more information or consider seeking financial advice."
The FCA’s discovery work with firms highlighted a number of areas of concern where some firms were falling short of expected standards. In particular:
The FCA has asked some of the firms involved in the review to undertake more work to see whether any of the issues identified may have resulted in consumers being disadvantaged.
Previously published guidance provides firms with a clear framework to develop products in a way that allows for a good result for consumers. While the FCA believes that the current regulatory regime is clear, it has said that if on-going supervision of this market does not show firms responding to its findings further regulatory action will be considered.
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