Swiss Financial Markets Regulator

In a press release, the Swiss Financial Markets Regulator (FINMA) notes:

3/2/2010
Investigations into Madoff and Lehman cases completed
Press release

FINMA completed two large-scale investigations in 2009. The first concerned the impact on Switzerland as a financial centre of the fraud committed in the USA by the US investor Bernard L. Madoff. The second looked at the distribution of structured products that were guaranteed by subsidiaries of Lehman Brothers Holdings Inc. Both cases led to losses for investors. FINMA identified the need for certain financial intermediaries to take corrective measures and has requested the necessary steps to be taken. The investigations did reveal, however, that current Swiss legislation does not adequately protect investors in investment advisory and wealth management services. FINMA sees a clear need for regulatory action in this regard and has therefore launched a regulatory project in relation to distribution rules.

FINMA sees the main issue in lack of sufficent regulation that protect consumers:

Both investigations showed, however, that the prevailing regulation does not adequately protect investment advisory and wealth management clients. There is a particular need for regulatory action to improve client protection in the following areas:

  • Information on return potential and risk of loss
    In addition to the return potential, risk of loss associated with the purchase of financial products must be explained in simple, comprehensible language in the sales documentation, which should itself be easy to follow.
  • Establishment of the client risk profile
    Financial intermediaries (point of sale) must be required to diligently establish the risk capacity and awareness (risk profile) of their clients not only in wealth management but also in the investment advisory business, and to ensure adequate diversification when providing investment advice. In addition, the existing rules on compliance with the principle of diversification need to be tightened up in wealth management.

An in-depth study currently being carried out by FINMA as part of a regulatory project will look at how these regulatory changes are to be made and by whom.

In short FINMA finds no violations of any laws or regulations by banks. It reminds people that “a bank may in general assume that a customer knows about the risk that are usually involved with buying, selling and holding of securities.”

There is, of course, some truth to this. As an investor, you should have an idea of what you are doing.
However, in the Lehman case, those structured products were advertised to customers by Credit Suisse as “capital protected”, which implies that the investment cannot be lost.
For example on the Deutsche Bank website you’ll find words to that effect:

Die Anleihe ist kapitalgeschützt, d. h. am Ende der Laufzeit oder alternativ bei vorzeitiger Kündigung seitens der Emittentin erfolgt die Rückzahlung zu 100% des Nennbetrages.

The bond is capital protected, meaning that at maturity or alternatively with early termination by the issuer, the nominal value will be repaid 100%. [my translation]

Nowhere is it explained that there are instances in which the investment can be lost entirely. The web is full of explanations of that sort.
The explanations of such investments are precisely and intentionally directed at people who do not know the details of those products, otherwise they wouldn’t need those explanations. Furthermore, consumers have been led to these products by an employee of the bank advertising it as ‘safe’. They did not got to the bank saying ‘I wan’t those products’.

In my view they are letting Credit Suisse off the hook too easily here.

Read full press release here.

The full report can be found here (german) and here (french). It currently is not available in English.

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