City regulator targets complexity of exchange traded funds in risk review

GROWING complexity in exchange traded funds and self-invested personal pensions pose a risk that those buying such products don’t understand them, the City regulator said yesterday.

Demand for newly-developed financial products such as ETFs is increasing as low interest rates and stock market volatility have encouraged investors to seek high yet stable returns, the Financial Services Authority’s Retail Conduct Risk Outlook report found.

“Firms have responded to the requirements of these investors by designing and offering increasingly complex products aiming to achieve the desired returns,” it warned.

“Rapid growth in the ETF market has led to a high level of innovation in this product area. This creates the risk that consumers do not understand the difference between product types in terms of investment strategy, tax status and risk.”

It also mapped out risky changes to financial services firms, such as ensuring in the run-up to the Retail Distribution Review that their “revenue maximisation does not lead to consumer detriment”.