Thursday, February 3, 2011

The big Structured Products fight


Casino © fintag

News comments:
The regulators have always hated structured products because they have never understood them.

So when Keydata came along, a reseller of retail SPs, and went bust with lots of money disappearing the FSA rejoiced. The fight was on. The FSA flexed its muscles and decided it was time to kill off the selling of anything less than a bank deposit account to the man in the street.

They pushed ahead with the nasty RDR (pdf) which is going to put most IFAs into early retirement and you and I will have to buy independent financial advice (bye bye comparison websites). Of course we won't and will take free advice from tied providers who will sell us what we don't want.

An analogy. Today, if you go to the madam in a brothel you will find there is no entry fee. Inside you can pick any of the girls you want. You have to negotiate a price and risk manage them not filming you, giving you a bad time or a disease or two. The madam will help you choose and will push you towards the one who will give you the best time so you will come back again.

In RDR world, you will face two doors.

If you enter the left door you will have to pay for entry. Inside you will face the same number of girls but this time the madam will have no long term incentive to help you select. She will take the entrance fee and go back to her desk.

If you enter the right door entry where entry is free, you will be greeted with the sight of a solitary horse.

The FSA hate IFAs (madams) and hate them selling structured products (girls with interesting characteristics). So when Keydata (a badly run brothel) collapsed, the FSA (the police) decided to make them an example.

Today we hear the FSA are billing other players in the financial sector for compensation to the unsuspecting retail investors who lost out to Keydata:

"LEADING City investment management and stockbroking groups were yesterday in open revolt about plans for them to pay £233m to a controversial compensation fund after the collapse of the financial products seller Keydata."


Normally I would be siding with financial institutions for the FSA completely fcked up. Keydata was FSA regulated. It followed the rules. It broke the rules. The FSA didn't do its job. So when the FSA "fines" others for its failure, it seems very unfair.

However, Keydata sold many products. It was not alone in doing so and was part of the huge investment banking "flog those structured products to the masses while we hedge them nicely and don't lose a penny" madness. They made a lot of money from this madness. So the FSA is right to seek compensation from these institutions. They were all playing in the same sand pit and yes it is unfair but then compensation is unfair. The FSA want two worlds which is fine. Like in the USA where you have mom and pop with lots of protection and the sophisticated who get no protection.

The lines in the UK were blurred and Keydata et al capitalised on that. The Investment Banks who didn't have any way of selling their delta hedges to the great unwashed found a nice conduit through Keydata et al.

It is still happening today of course. Check out the stuff Investec pumps out. I am a smart guy and even I don't understand half the products. I shouldn't even be allowed onto this website. Its a bit like coming up with the website front door...

This site is dangerous. If you are 18 and over and have a strong stomach then click here. Otherwise don't.

Those complaining should sue the FSA for incompetence. The FSA should stick to its guns and expose the monies made by these institutions. And the UK government should stop us mere mortals having access to dangerous structured products.

Today's shorts:
Lion Trust Roar (reuters)

Run on the Irish banks (telegraph)

Today's longs:
None today.

FSA to be forced to leave Canary Wharf and move into a nuclear shelter somewhere up north.


Leggy said...

Very amusing. Sad about the horse though.

Anonymous said...

"Those complaining should sue the FSA for incompetence". Sue the FSA! - you've got more chance of suing George Bush for the invasion of Iraq.