Structured products should not be considered as all the same
The UK Structured Products Association was set up to provide a source of information, education and comment to show the benefits of using structured products alongside other asset classes and investment types in well balanced, efficient portfolios.
I shall repeat one word of that last sentence for clarity and that word is “alongside”.
The critics of structured products seem to have come to the opinion that structured products are here to take over the world and eat up their business and they fear them. The constant attacks on the products and the people do the repeat offenders no credit.
Some of the criticism tries to ignite opinion by using inflammatory words such as “ban them” and “victims” when describing structured investments where people who are advised to, or shock, horror, have chosen to invest.
This type of rhetoric adds no value to the debate or lack of debate and shows a lack of understanding where the commentators often confuse elements of two very distinct types of products and try to combine them.
There are two distinct types of structured products widely available in the UK retail market. The first type would be those plans or funds backed by securities such as notes, gilts, warrants and securities where the potential return was dependent on both the default risk applicable and performance of the linked index/indices.
The second type would be a structured deposit where the return paid to the investor is entirely dependent on the deposit-taker meeting its deposit obligations, in exactly the same way as where interest is payable on a savings account. The only difference being the access to the money that was available. Deposits are due repayment under law.
The two types of product described share some similarities - use of derivatives and linking to some kind of index/indices to give the stated return and the fact they would both have fixed maturity dates. But apart from those, they are as different as oranges and apples, or index trackers and VCTs. All investment products should be considered completely separately from a risk and advice basis.
This message is one that the UK Structured Products Association is keen to relay to investors, financial advisers and other asset management professionals. Too often, structured investments are considered as one generic type of investment sharing the same risk and reward attributes. This is a myth and the association members are keen to inform the market about the variety of structured inv-estments alongside the variety of portfolio applications.
Where the criticism from the intermediary market consists of a lack of understanding, the association believes this view will not hold up after the RDR.
Intermediaries should be actively seeking knowledge and understanding of all products to provide a whole of market service.
The industry is happy to foster educated and knowledge-backed opinion and debate in the structured investment sector.
James Harrington is chairman of the UK Structured Products Association