ETFs – EXCHANGE TRADED FUNDS

In the FSA’s Retail Conduct Risk Outlook 2011 ETFs were highlighted as an area for concern.

The FSA has stated: 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. For example, there are an increasing number of synthetic (also called swap-based) ETF products that expose investors to collateral and counterparty risk.

Similarly, consumers can access ETF products from overseas jurisdictions that may operate under a different regulatory and tax regime. There are also numerous other types of exchanged-traded vehicles such as Exchange Traded Notes (including Exchange Traded Commodities) that may pose additional risks to consumers.

Essentially the FSA are concerned that consumers’ lack of familiarity with ETFs increases the products’ risk and as such the FSA plans to increase their supervisory vigilance in this area.

ETFs pose potential mis-selling and conflict of interest issues, so you need to ensure robust processes to prevent risk.

Regular systems and controls reviews are an ideal way to mitigate the regulator’s and consumers' wrath. To discuss how TCC can support you in this area, please call 020 3008 6020 or email info@theconsultingconsortium.com