Welcome Anonymous
During a board meeting your Sales Director asks one of his staff from product design to present to the board your bank’s latest structured product, which is due for imminent release. The product, code named Lemming, will be labelled in the name of a leading insurance company and sold and distributed through their UK & European sales force. Only in the small print will your bank’s connection be disclosed.
The presenter demonstrates Lemming’s ability to offer a highly competitive fixed rate of interest over the next five years, which will make it attractive to retail investors. Also, he points out that should the stock market have fallen by more than 30% at the end of the five year term, there will be leveraged capital erosion, which will magnify any losses.
Your Sales Director then outlines the insurance company’s plans for a major sales campaign aimed at the retail market, especially those investors dissatisfied with the low rates currently available on ordinary bank deposits. He discusses the documentation given to the insurance company by your firm and explains that the point of sales process and promotional literature will be the responsibility of the insurance company.
The launch of the new product is close and undoubtedly will have a high profile. The Sales Director intends Lemming to be the first product in what could be a hugely rewarding link with the insurance company. Executive Board members generally appear very enthusiastic with this possibility but one of the Non-Executive Directors asks if there has been a discussion about the intrinsic merits or risks arising from this process. He is concerned that all previous discussions concerning Lemming may have focused exclusively on the ability to generate revenue, establish new distribution channels and foster strong links with the insurance company. He wonders whether the potential risks are being adequately addressed at senior level and if the Sales Director’s eagerness to launch the product has obscured the need for full consideration to be given to the possible reputational and financial risks to the bank, should the worst case scenario occur.
In response to the question from the non-Executive Director, the Sales Director explains that the risk of investor capital erosion, although present, is very low and that, in addition, the possibility of such an event had been clearly stated in the documentation provided by your bank to the insurance company. The Executive Directors are of the opinion that due consideration of the risks has been undertaken and that to emphasise the possibility of capital erosion at the point of sale, would make the product unattractive. Accordingly, they are happy to approve the launch as planned. What are your initial thoughts?
Although the first sentence may be obvious, it is not solely for this reason that you are reluctant to approve the launch. In this option you do go on to review ‘everything’ i.e. the product and the literature, to ensure Lemming is not mis-sold, but then, rather than seek an independent view such as Compliance, you ask the Sales Manager, in effect, to review himself. To select this as a course of action isn’t wrong, but it is not the best answer. By being vague over what, precisely, is the area of concern, you are likely to receive the rubber stamp from the Sales Manager, who doesn't share your view that there is anything else which needs to be done to the product. A better response to avoid serious damage, to both your product and your new relationship with the insurance company, is a clear, independent and quick review.
It is fair to take the view that the higher the potential return, the higher the potential risk. However, the magnitude of the risk is not the issue here. The question is whether the degree of risk is accurately being conveyed to the person taking it. To claim that you have merely informed the distributor is insufficient. Your bank has a responsibility to the product purchaser to ensure that it is not being mis-sold. Therefore, this is the poorest of the options.
Given the background information, it would be very hard to decide which way to turn. Your Executive Board members want you to sign off the launch of Lemming, for sound business reasons. They accept that there is a risk the product could lose money for the investor, but consider it to be a low risk. They are, however, worried that to delay will cause problems. You certainly wouldn’t want to delay the launch unnecessarily, but you must satisfy yourself that adequate warnings are given to the investor. Accordingly, to seek a further opinion from your Compliance Director is a sound move and the best option available to you.