After the fall
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Structured products have taken a battering. Hannah Stodell and Christopher Jarvis report on industry moves to repair some of the damage
After the precipice bond debacle, Lehman counterparty exposure and, most recently, the FSA market-wide review, structured products are contending with serious public relations damage that a new trade association is seeking to repair.
The UK Structured Products Association launched last week with membership including CitiGroup, Credit Suisse, Legal & General, Morgan Stanley, Prudential, Royal Bank of Scotland, Santander and Skandia.
Its aim is to educate the market on structured products, “sometimes misunderstood and misrepresented”.
But product providers seem unshaken by the recent FSA report and believe it is unlikely to lead to swathes of advisers shunning the market.
Meteor managing director Graham Devile says: “You will always end up with one or two people who are not prepared to operate in any arena. There will be people who opt out but, on the whole, I do not think that will happen.”
However, whether advisers will face increased costs from professional indemnity insurance premiums to operate in the market is a “watching brief”, adds Devile.
He says: “In the past insurers have not been too bad with this. You have always been able to get PI cover but trying to guess what they will do is difficult.”
Baronworth Investment Services director Colin Jackson says premiums could rise by as much as 50 per cent next January. He says: “In the new tear, anybody with a policy due for renewal will probably see an increase in their premium, which could not come at a worse time for the IFA community.”
He believes that if insurers start hiking rates and introducing higher excesses for structured product business, it will have one of two effects: “Either advisory outfits will say it is not worth the aggravation or they will consider going down the execution-only route.
“It is very hard to change because if there is 3 per cent on a structured product we would retain 1 per cent, whereas adviser firms would retain all of it so you would be suddenly giving up two- thirds of your income.”
Alan Steel Asset Management consultant Alan Adam says PII will be an issue for the market and that firms will have to pay more for their cover if they have over 10-15 per cent of their business in structured products.
He says: “We may see advisers pass to third-party managers such as Midas or Jupiter Merlin fund of funds who might have structured products in there as part of their overall portfolio.
“People have lost confidence in structured products, both advisers and clients. Not all are the same, but that market is going to be tarnished. They are going to come back but providers will struggle in the short term.”
Investec structured products head of intermediary sales Gary Dale is more optimistic about the market outlook. He says: “The industry has gone some way to repairing itself and advisers know that, given the market is just shy of £12bn in total in the UK. I would expect it to close at the end of the year around £18bn-£20bn.”
Commenting on Lehman Brothers, he says: “We are talking about an institution that provided hedging for a few distributors of structured products across the entire market. The size of that market was relatively insignificant compared to the whole.”
Third-party administrator Opal says despite the high-profile issues in 2009, the market will continue to grow by 20 per cent next year.
It also anticipates a move towards a new classification for no-risk/ guaranteed products.
Managing director Tony Collins says: “Many companies see the benefits a specific type of structured product can offer. I welcome the closer review by the FSA as this will help create stability in the market.
Returns of more than 5 per cent, capital protection and protection under the FSCS give the market a healthy future.
“We will have to wait and see whether the recent launch of the UK Structured Products Association will go some way towards securing that future. It intends to counter negative publicity and educate the public about the misunderstood investment class.”
Members include several banks, life insurers and independent plan managers. However, key players, such as Barclays, Investec and Blue Sky Asset Management, are notably absent.
Blue Sky Asset Management says it is wholly supportive of the association but wants to see more formal and full detail before it commits.
Lowes Financial Management managing director and Structured-ProductReview.com founder Ian Lowes says: “Given the bashing to the sector this year, it could be argued the launch is better late than never.
“Any initiative to help educate and inform is welcome, and I am sure even the most vociferous, anti-structured product pundits will agree it is a positive step.”
The seven-year-old US-based Structured Product Association supports the new launch and is due to open a UK office to drive its own message home in January.
Chairman Keith Styrcula says: “The name UKSPA might cause confusion and is something we are looking into, otherwise it is a positive development. We have had a successful year in the UK with structured products coming back in the aftermath of the Lehman crisis. We are encouraged by the upward trend.
“However, we are concerned there are mixed messages being put out. The mutual fund industry has a tendency to bash structured products and we have got to reverse that trend.”
