Following Moody's rating updates on several UK banks, a number of providers have updated their literature to reflect the downgraded counterparties and most are writing letters to clients.
"I certainly think during the marketing period and before the product strikes, providers have the responsibility to inform those investors that have made a decision based on a different financial strength rating give them an opportunity to change their mind prior to the strike of the contract," said James Harrington, head of business development at Legal & General.
Harrington said, however, there is no specific obligation to notify investors of a downgrade during the term of the product: "I think it is important to recognise that at that point an investment decision has been made and clearly it might not be beneficial to take your money away because the price of that product will be lower pre-maturity... we can't forget these are at-maturity products."
Graham Devile, MD at Meteor Asset Management, which is still contesting an FSA decision that the firm should compensate a couple for not informing them of the Lehman downgrade before its collapse, told SRP Meteor has updated its website to reflect the new ratings and that the firm will contact clients: "We will be writing to our clients as a matter of courtesy to notify them in case they have not picked up on it."
According to Chris Powell, head of IFA sales at Jubilee Financial Products, there isn't anything in the FSA rules about this, but the firm will write to clients as it believes this is good customer service: "We did the same last month when Bank of America and Citi were downgraded, and earlier in the year with Commerzbank, but we do it in a factual way rather than as if it were a warning."
Gary Dale, head of intermediary sales at Investec, told SRP that Investec's approach is linked to its own mandate: "We launch back-to-back, so independently of where the product is the investor still holds an investment linked to the counterparty, and it makes sense to advise clients in the most efficient way," he said. "History tells us that the FSA takes a very strong view when the provider/manufacturer does not inform its clients of a counterparty update. That's what the Lehman case has shown us."
A source who wished to remain anonymous said the downgrade is clearly misleading, as Moody's specifically said the financial positions of the banks have not changed and the alteration is based on its perception that governments might not bail out banks in trouble: "This is showing how post-Lehman we are now in a situation where nanny-state applies [and] where things cannot happen without people anticipating or knowing about them," he said. "Despite using double standards, the FSA has made the industry believe that this is a treating customers fairly issue."
Most of the providers approached told SRP the downgrade of UK banks will not have a major impact on the UK's SP business because all of the counterparties are more or less in the same situation and the downgrades are just another consideration alongside CDS. If anything, said Meteor's Devile, the downgrade creates opportunities as providers will be offering more to fund their activities and the secondary market will be offering some interesting entry points.