Are structured products too complicated and opaque for the retail market? That seems to be the central problem for a number of IFAs over the recommendation of this type of product to their clients.
This issue has come to a head recently with a row between the Investment Management Association and structured product providers over the transparency and appropriateness of these investments for investors.
The IMA has been a vocal critic of structured products this year. In June, the IMA responded to a document published by the Financial Services Consumer Panel which outlined a 10-point plan for better financial services by attacking structured products for their complexity.
The FSCP’s plan called for “simple, safe, comparable” products and to “end complex product innovation that obscures risk”.
In the IMA’s response, chief executive Dick Saunders said: “We support the call for transparent product design and good communication which enables customers to compare products. We have long been concerned about complex structured products with hidden risks and unnamed counterparties.”
In July, the IMA returned to the issue of structured products with director of authorised funds and taxation Julie Patterson saying that any changes to UK regulation should not disadvantage different retail investment products. In particular, she said structured products should not be subject to lighter regulation which placed less emphasis on the disclosure of risk.
Patterson says the change in regulation that will be brought about by the formation of the Consumer Protection and Markets Authority could allow some bank-designed products to work under much less stringent regulation.
Patterson says: “Disclosures at the point of sale will all come under the CPMA, but regulation of what is in the products themselves will differ.
Authorised funds are subject to detailed and comprehensive rules to protect retail consumers, which we understand will come under the CPMA. Listed, closed-ended investment companies – investment trusts, Reits and VCTs – are subject to special listing rules designed to protect the general interests of investors, which it is proposed will sit with the Financial Reporting Council. The regulation of insurance products, such as it is, is within the prudential rules for life companies, which will sit with the Prudential Regulation Authority. And banking products are subject to no real restrictions on the risks of the underlying investments.”
This attack on structured products provoked a strong defence of the sector by its trade body, the UK Structured Products Association.
In a statement, it said: “It is disappointing that the IMA continues to be outdated with regard to structured products. Contrary to Ms Patterson’s comments, structured products are governed by the same regulatory framework which monitors investment funds.
“The FSA and structured product providers aim to provide clear and appropriate information that is made available to financial advisers and investors and ensure that products are marketed responsibly.
“As a result, structured product literature has become vastly more open and transparent concerning counterparty disclosure, credit risk, charges and expected returns.
“The association whole-heartedly agrees with Ms Patterson that all investments for the retail market should be open and transparent, however her assumption that the structured products sector is ’resisting’ this objective is incorrect. The very existence of the association, much like the IMA’s own existence, is proof of the sector’s commitment to this objective.”
’We have a very, simplistic or open view of these things. We do notwant to be getting people into products that they do not understand’
The Structured Products Association says its members are continuing to make efforts to educate and inform the industry about the workings of structured products and that the view that the investments as opaque is out of date.
“It is clear that some market commentators continue to require additional education about structured products as their most recent research into the sector predates the events of the last few years. The members of the UK Structured Products Association are keen to offer the IMA and the investment industry the information and guidance they need to understand the current structured products market.
“We suggest the IMA should stop being intimidated by investments that are not funds and instead join the UK Structured Products Association in its efforts to promote the benefits of a diversified investment portfolio which should include a range of complementary products.”
But despite the assurances of the trade body and any improvement of the disclosure and transparency of retail structured products, many IFAs say structured products can be difficult to understand for advisers and clients.
Technology and Technical managing director Kim North says the industry has made significant improvements in the last couple of years but perhaps more could be done.
North says: “The issues we have seen with the Lehman Brothers’ collapse and the Keydata debacle have heightened the importance of the counterparty. Previously, it has been very unclear to all, investors or IFAs, what the deal was between the counterparty and the product issuer. The industry is trying to make structured products a lot clearer but I still do not think they are as transparent as they should be.”
The problem, according to Informed Choice chief executive Nick Bamford, is not with the design of products specifically but the much more general problem of ensuring the client understands the product and the way it works.
He says: “If I am going to recommend something to you as a client, I want you to understand how it works and what risk is involved and what guarantees exist or do not exist. The problem with a lot of structured products, and I may be being totally unfair to some, is you cannot easily work out who the parties inv-olved are and what their resp-onsibilities and liabilities are.
“We have a very, simplistic or open view of these things. We do not want to be getting people into products that they do not understand.”
Without this understanding, he says, regardless of any opinion he may have about the products, he cannot recommend them to clients. “We owe them that duty don’t we?”
“If there is a new set of structured products created that I can explain to my clients in under two minutes, I am prepared to listen but so far I have not seen any evidence of that.”