Protecting your clients

Monday 23 August 2021

Ethics case study 4 : Complex Products

Outline of the case

Security State Bank offers a diverse range of products, dealing with a range of customers from retail customers to large corporates. The firm has a natural advantage with retail customers due to strong brand recognition, a well-established network and a large sales force. The firm positions itself as being uniquely placed to create tailored solutions to meet the needs of a mass market of its customers. Analysis of the most recent financial statements has indicated that sales of complex products to wealth management and small business customers accounts for half of the profits of the markets division.

John has been a supervisor within Security State’s wealth management division for 5 years, having previously worked as a customer advisor. John has taken a keen interest in the full range of products produced by Security State and regularly attends seminars on new products that are being launched.

Mark, a member of John’s team, has the second largest portfolio of clients in the team, behind Ryan, who has sold complex structured products to a large number of his clients. In one to ones, John is always keen to discuss sales of structured products with Mark, where he regularly lags behind the rest of the team.

Mark has recently been introduced to Mr and Mrs Smith via referral from another client. The circumstances of the couple are as follows:

  • Mr and Mrs Smith are both in their mid-60s and retired
  • Mr Smith ran a successful software company which he sold for a profit of £2 million the previous year
  • They have identified a specific need as paying private school fees for their two grandchildren, approximately £30k a year for the next 10 years
  • For the Risk Appetite section of the questionnaire, Mr Smith has an investor profile of “Moderate to Adventurous” and Mrs Smith has an investor profile of “Moderate”

Mark recommends that Mr and Mrs Smith invest £500,000 in the Income Plus Structured product. This product provides an annual return of 6% for ten years. The product guarantees a return of capital after 10 years providing that a number of indices do not fall outside of a set range. Mr Smith states that he does not fully understand the product but that, based on Mark’s advice, they will proceed.

Six months following the sale, one of the indices falls far outside of the range expected with the product. Income is suspended from the product and capital is put at risk.

The Smiths complain about the product performance and their complaint is not upheld on the basis that all relevant warnings were given.


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