The Financial Conduct Authority (FCA) has warned firms to take care over how they assess, market and monitor complex exchange traded products (ETPs) for retail investors.
Complex ETPs typically involve higher-risk investment strategies, including leveraged and inverse products. Selling these products to customers who do not understand them would be a breach of the regulator’s Consumer Duty rules, it said.
Unusual features such as recommended holding periods and the potential impact of holding products for longer than intended were of particular concern.
The FCA noted that, more broadly, features which make ETPs complex include use of leverage, short or inverse investment strategies, and daily resetting of exposure.
It specifically highlighted crypto exchange traded notes (cETNs) as an example of high-risk ETPs.
The regulator’s review examined firms of different sizes and business models, focusing on how they define target markets, assess customer knowledge, communicate risks and monitor customer outcomes in line with the Consumer Duty.
Execution-only and non-advised platforms were mentioned specifically by the regulator, which noted that they were making complex ETPs “increasingly accessible to retail consumers”.
According to the FCA, some firms demonstrated “detailed processes” for defining appropriate target markets, assessing customer knowledge and monitoring outcomes.
However, others showed weaker controls, including limited assessments of a customer’s investment experience and knowledge.
The regulator also identified issues with risk disclosures.
In some cases, communications were unclear, making it harder for consumers to understand the risks associated with these products.
“Given the complexity and risk profile of ETPs, it is essential firms make sure investors have the knowledge they need to make informed investment decisions,” the FCA said.
The watchdog said firms should review their existing processes to ensure they meet Consumer Duty requirements, including addressing any gaps in appropriateness checks and improving how risks are communicated to retail investors.
“We want firms to put consumers first by making sure products and services meet their needs, and communications are clear to support understanding,” the FCA said.
ETPs cover a wide range of products, from relatively straightforward investments to higher-risk offerings.
While complex ETPs represent only a small proportion of the overall ETP market, the regulator said their specific features can pose challenges for retail investors, particularly where the products are not held as intended.
