Would an impartial third party consider my behaviour reasonable and acceptable?

Does what I have done comply with existing rules and legislation in both letter and spirit?

Would I feel uncomfortable if this matter and my part in it appeared in the press?

Or, at a more personal level, would I be happy to tell my family about it?

HONESTY OPENNES TRANSPARRANCY FAIRNESS

Mis-Marketing
You are the Non-Executive Chairman of an
investment bank.
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?

The reputation of the bank is paramount and any possibility of a retail product suffering from
leveraged capital erosion is undesirable. Therefore, you are reluctant to approve the launch of
Lemming until your team has reviewed both the product and the sales literature and checked
that Lemming is not being mis-sold by the insurance company.

Although concerned by the comments of your non-Executive Director, you are inclined to side
with your Board, accepting that, generally, the higher the potential return, the higher the
potential risk. Clearly, products pitched at retail investors should be of the lower risk/lower return
type. In your opinion, Lemming, although a higher risk product, will attract retail investors
prepared to take a little more risk in order to gain a higher return. However, because the risks
have been clearly identified in the internal documentation, which your firm has given to the
insurance company, you consider that your bank is acting responsibly.

You are unsure whose opinion to follow. To delay the launch of the product would prove costly
to the insurance company and could damage, perhaps unnecessarily, your relationship with them,
which your bank has worked hard to achieve. However, should the product go out for retail sale
and, following an unforeseen down-turn in the stock market, leveraged capital erosion does
occur, the damage to your reputation would be great, particularly if it was felt that warnings of
the possibility of such an event occurring were understated. You don't wish to delay the launch of
Lemming but, as you are not entirely comfortable with the situation, you seek the views of your
Compliance Director on the responsibilities of your firm in this situation.

After the launch of Lemming, the product is reviewed by the financial media. A journalist
notices that your bank is the product provider and, in an article, questions whether retail
investors might reasonably be expected to understand the risks involved with such a
leveraged product. You wonder whether you should respond publicly and if so, how? What
might you do?

wonder whether you should respond publicly and if so, how? What might you do?

Insist that the documentation supplied by your bank to the insurance company, who markets the
product, clearly identifies the risks inherent in Lemming. Privately you will review the position
after you have the first month's sales figures.
 Have your Sales Director respond by pointing out that it is the responsibility of all investors,
whether professional or retail, to familiarise themselves with all aspects of a product before
entering into an agreement to purchase.

Accept that the journalist has highlighted a problem which may not have been fully considered.
You decide urgently to organise a Divisional Committee to investigate the potential investor risk
and how best to manage the situation.