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					    ILAG                                     Investment & Life Assurance Group
                                                   The Practitioner Voice

Mrs Susan Cooper
Conduct of Business Standards Division
The Financial Services Authority
25 The North Colonnade
Canary Wharf
E14 5HS

31 October 2003

Dear Ms Cooper

CP 188 – Clarification and revision of financial promotion Rules and

ILAG is a professional representative body concerned with the future of the
investment, life assurance and pensions industry. It is led by practitioners, and
aims to identify and develop industry best practice.

The Group currently has a growing membership of around 45 practitioner
companies and associate members. In addition, a number of individual
members are affiliated to the Group.

Prior to responding to the specific questions raised, we would like to make a
number of general points.

Scope of Requirements

We appreciate that Guidance Note 7 was issued in response to your
increasing concerns about investors losing capital in structured product
investments as a result of falling stockmarkets, and that many of these
investors had selected the product to secure a fixed income, without fully
understanding the risk to their capital.

However, the position of investors in structured growth products needs equal
treatment. It is in this area that there are differing standards within the
industry at the moment and we feel that this balance needs to be redressed.

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    ILAG                                       Investment & Life Assurance Group
                                                     The Practitioner Voice

Where Plans provide a fixed rate of income or growth, and a variable capital
return, it is only the incidence of the loss that differs, as investors in both type
of products run the same risk to capital.

We are pleased to note that the SCARP definition includes growth products
but are disappointed that the actual proposals for the provision of the FSA
Factsheet information specifically exclude growth products (section 2.4).

The Factsheet

We feel that the leaflet is too broad for structured products. Indeed there is a
large section on Corporate Bonds, but such bonds are not subject to these
requirements. We would suggest a more tailored Factsheet to cover SCARPs.

The logical extension of this is that there should also be one for Corporate
Bond Funds and indeed for any fund where the investor could lose some or all
of their capital.

Current practice

Section 3.8 of the Paper correctly sets out that as most SCARPS are not
packaged products, there is generally no requirement at present for firms
marketing them to produce Key Features documents or send regular
statements. However, in practice, many of the large providers do include Key
Features information, and send annual statements out to all planholders. That
said, we do welcome the formalisation of these requirements.

Consumer education

There is a definite need for consumer education of such products. One of our
members has issued a guide to structured products and we will continue to
work with FSA to increase customers‟ – and the media‟s – understanding of

We would be happy to discuss this response in more detail

Yours sincerely

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                                                                Telephone: 01844 273630
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    ILAG         Investment & Life Assurance Group
                       The Practitioner Voice

Sue Rice
Group Director

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                                  Telephone: 01844 273630
                                        Fax: 01844 273631
                                      Mobile:07950 327513
    ILAG                                         Investment & Life Assurance Group
                                                       The Practitioner Voice

Question 1: Do you agree that the proposed definition for a SCARP is
appropriate? If not, should we also include other product characteristics or
give examples?

We agree with the proposed definition.

Question 2: Do you agree with our proposal to require firms to include the
information in the FSA Factsheet “High Income Products – make sure you
understand the risks” with direct offer financial promotions for SCARPs that
offer income?

We agree with the thrust of this proposal. As we have argued in our general points,
we think that this should go further and include growth products, as investors in these
products suffer the same risk of loss to capital.

In addition, we would seek clarification on the presentation of the information in the
Factsheet. In Section 1.4, it is stated that the requirement is to include the FSA

Section 2.4 states that the requirement is to include the Factsheet “or equivalent
information”, and this form of requirement is iterated in 4.5.

Proposed Rule 3.9.31 sets out that the firm must ensure that the “information
contained in the FSA‟s Factsheet…. is included in the mailing pack…”. If it is
intended that firms should not have to include the actual Factsheet, reproduced from
FSA artwork, but provide equivalent information, the exact meaning of „equivalent‟
needs to be explained; i.e. does this mean equivalent in terms of text, font size,
booklet format, or all three. This is a fundamentally important point to companies in
this market in the design and preparation of their marketing literature, and as will be
discussed later, in their budgeting for marketing costs.

Question 3: Do you agree that the proposed SCARP warning is appropriate?

We agree that a robust warning is required, but would question the terminology of
Proposed 5.4.11E (1) (g). We would suggest that this could be replaced with “unless
he is prepared to accept the risk of losing part or all of the money he has invested.”
We appreciate that there are certain structured products at present where there is a
probability of total capital loss, but in general, the structured products available now
have a higher soft protection, so we feel that the revised wording more accurately
reflects their risk profile, without diminishing the strength of the warning.

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                                                                   Telephone: 01844 273630
                                                                         Fax: 01844 273631
                                                                       Mobile:07950 327513
    ILAG                                         Investment & Life Assurance Group
                                                       The Practitioner Voice

Question 4: Do you agree that consumers of SCARPs should have the same
right to periodic information as consumers of packaged products?

We fully agree, and would refer to our general comment that a number of product
providers provided such information prior to the introduction of GN7.

Question 5: Do you agree that our proposed approach would provide adequate
periodic information to holders of SCARPs? If not, what other information do
you suggest holders of SCARPs should receive?

Yes, we agree that this approach should provide adequate information to holders of
SCARPs. However, one effect of providing the customer with a value akin to a
surrender, or encashment, value may be a higher incidence of early surrender.

We have noted that the requirement set out in the table to proposed rule 8.2.17E,
with regard to the level of the relevant index (ices) at which the maturity value would
be affected, differs from the requirement set down in 3.6(2) of GN7. The current
requirement is to provide a reminder of the level at which the maturity value would be
affected, and by how much, while the proposed rule requires only the level at which
the maturity value would be affected. We would like to see the current requirement
maintained as we feel it is more complete.

We suggest that a statement about the need to seek financial advice before acting on
the information should be included.

Question 6: Do you agree that our proposals in respect of Financial Promotion
for SCARPS are proportionate and practicable?

In view of our comments on growth products and other investment products, we do
not feel the proposals are proportionate. As we have stated in our general response,
we understand the reasons for these requirements. However, some of the features
highlighted such as counterparty risk and potential loss of capital also apply to other
types of investment, for example any unit fund, and there is no equivalent
requirement to provide similar information in these cases.

Question 7: Do you agree that our definition of structured deposits accurately
describes deposits where part or all of the interest or premium to be paid on
the sum deposited is dependent on or at risk due to the structure of the
product? If not, how would you describe those products that should also be
caught by this definition?

We agree that the definition adequately describes such deposits.

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                                                                  Telephone: 01844 273630
                                                                        Fax: 01844 273631
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    ILAG                                            Investment & Life Assurance Group
                                                          The Practitioner Voice

Question 8: Do you agree that it is appropriate to extend these high-level
financial promotion requirements (and guidance) to financial promotion
structured deposits in order to ensure that consumers of these products are
properly protected.

There should be a level playing field for all types of structured products. Thus any
financial promotion rules should cover structured deposits as well as packaged

Question 9: Do you agree that our proposals to provide additional guidance on
how financial promotion should deal with the possibility of capital loss, the
extent to which capital is tied up, the use of headline rates and the promotion
of capital protected products are appropriate and proportionate?

We generally support the FSA‟s proposals but have some specific comments for
each area as follows:

Capital loss
We support the proposal to prominently state the possibility of capital loss. It is
important that this type of risk should be brought to the customer‟s attention, whether
they are buying a structured or other type of product, so that they understand the
risks that they are taking on.

The requirement to indicate the likelihood of loss would suggest providing some kind
of probability statement. In order to calculate such probabilities past performance
figures would need to be used. If these proposals were in force when contracts that
are maturing now and that have suffered a capital loss were sold, these statements
would show that the likelihood of loss was very low. Conversely for contracts being
sold now the probability would be higher due to recent poor stock market
performance. This does not seem to be a sensible approach. We feel that a simple
statement that there is a likelihood of capital loss, or a possibility of loss to part or all
of a customer‟s capital, together with an explanation of the calculation of the capital
return should be sufficient.

Extent to which capital is tied up
It is common to defer payment of maturity values after the end of the investment
period to allow time to calculate the maturity values, to program this into payment
systems, to realise the assets backing the contracts and to physically make the
payments to customers. The proposals allow four weeks to complete these steps
without having to include the statement about capital being tied up, which seems a
reasonable period of time.

Use of headline rates
We support this proposal

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                                                                      Telephone: 01844 273630
                                                                            Fax: 01844 273631
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    ILAG                                          Investment & Life Assurance Group
                                                        The Practitioner Voice

Promotion of capital-protected products
We support the proposal to explain fully the counterparty risk but note that this is not
required for other investment products, such as any unitised fund, where the same
risks exist.

However, we think the proposal to explain the cost of protection provided will be
difficult to explain and will lead to customer confusion rather than clarity. In practice,
protection is provided by investing part of the assets in zero coupon bonds provided
by an investment bank. Most customers will not understand what zero coupon bonds
or corporate bonds are, so a further explanation would be needed. In addition the
cost of protection is just one element of the total return to the customer and would be
confusing if detailed specifically – the customer is interested in the total package
rather than individual elements of it.

Question 10: Do you agree with the changes we propose to make to COB 3
Annex 4 to make it more accessible?

Yes, we agree with these changes.

Question 11: Do you agree that the changes we propose to the Guidance
relevant to financial promotions for products offering guaranteed income but
not guaranteed return of capital, are appropriate?

We agree in general with the changes, but would question the terminology of some of
the relevant guidance. For example in the table to Annex 4G, Section III H refers to
high-income products, whilst the next section refers to stockmarket products. We
would expects SCARPS providing a fixed growth element, rather than periodic
income to also be covered under section H, although much of the information
suggested in Section I is also applicable to these products. We would like to see
additional clarity here.

Question 12: Do you agree that the transitional provisions proposed are

Yes, we feel that the transitional provisions are appropriate.

Question 13: Do you agree with our estimate of training costs for these

No, we feel that the estimated training requirements set down in 5.26 grossly
underestimates the numbers of people for whom re-training would be required, and
ignores the resultant systems changes to update procedures. For product providers
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                                                                    Telephone: 01844 273630
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    ILAG                                         Investment & Life Assurance Group
                                                       The Practitioner Voice

it will be necessary for all administration staff dealing with queries on SCARPs to be
aware of the changes so that they can adequately and appropriately discuss these
with customers and/or independent financial advisers or their own sales staff.

These administration training costs are, of course, in addition to the training
requirements for sales personnel of product providers and IFAs.

Question 14: Do you agree that we have made realistic estimates of the costs
associated with these changes? If not, do you have any further information
that we should take into account in this analysis?

The costs are based on a figure of 5 million direct offers. Whist this seems
reasonable in current market conditions, we feel that going forward they do
underestimate the size of this market.

Question 15: Do you agree that we have fairly assessed the benefits of these
proposals? If not, what additional considerations should we take into

We agree that the benefits of these proposals have been fairly assessed. However,
we remain unsure that these proposals will provide a level playing field for all capital
at risk products.

Question 16: Do you have any comments on the compatibility statements?

We have no comment on this.

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                                                                   Telephone: 01844 273630
                                                                         Fax: 01844 273631
                                                                       Mobile:07950 327513

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