View more on these topics

Life after Lehmans

Gregor Watt surveys the structured product scene after the big counterparty collapse.

The last 12 months have been eventful for the structured products market.

The continued fallout from the collapse of Lehman Brothers has seen several familiar structured providers disappear, a review of the market launched by the FSA and a record fine handed out for RSM Tenon over poor compliance for structured product sales.

At the same time, demand for these investments has grown strongly, issuance of the products is up and returns from many of the maturing products are good.

Lehman Brothers’ collapse has continued to have the most significant impact on the structured products market almost two years after it filed for bankruptcy.

In October last year, Lehmans’ collapse caught up with structured product providers NDF Administration and DRL Ltd when both companies went into administration. Although only 10 per cent of their products had Lehmans as the counterparty, the two companies had over 35,000 investors in total, with NDFA having £30m exposed to Lehmans.

Although the functioning plans were bought out of administration by Meteor and the non-Lehmans plans have continued to run as designed, the fallout from the collapse of the providers has proved unsettling for advisers.

The collapse of structured product provider Keydata has also made headlines for all the wrong reasons.

Although it was tax issues and non-compliant Isa plans which led to Keydata’s demise, the company was also a significant and high profile structured product provider.

As Technology and Technical managing director Kim North points out, this has meant that the attention paid to the counterparty of any structured product has become one of the most important factors in assessing structured products.

North says: “The issues we have seen with the Lehman Brothers’ collapse and also with the Keydata debacle have certainly heightened the importance of the counterparty. It is very, very important that investors and IFAs understand what the counterparty terms are with the product issuer.”

The collapse of Lehmanbacked products and of Keydata has led to a sharp increase in the number of complaints to the Financial Services Compensation scheme and a significant one -off levy on investment advisers to pay for any claims.

’Structured products are not suitable for everyone and anyone considering structures should make sure they understand the product and the risks involved before making a decision’

The FSCS says over 60 per cent of its new complaints in 2009/10 were due to structured product providers.

The FSCS annual report says: “Our work during the year was heavily influenced by Keydata Investment Services Limited and various structured product providers that failed. This meant that 60 per cent of new claims were in the Investment Intermediation sub-class for funding purposes.”

The resulting £80m interim levy to cover the extra costs to the FSCS over these product provider failures includes £22m specifically to cover the costs incurred by NDFA, DRL and Arc Capital and Income. The FSCS has determined that the firms were intermediary firms and so the extra costs are being applied to the investment intermediary sub-class rather than the investment management sub-class.

The levy has provoked a strong reaction from IFAs who claim that they are being forced to pick up the tab for failures in the marketing literature provided by the product manufacturers as there was nothing wrong with the advice.

Lowes Financial Management managing director Ian Lowes said: “The FSCS claims are predominantly arising as a result of literature failure so that falls on the provider. But they are saying providers are not providers, they are intermediaries. If they are intermediaries, who are the ones giving the advice?”

The UK Structured Products Association, trade body of the structured product providers, however, defended the market and has pointed out that compared to the amount of money invested in structured products they generate proportionally very low numbers of complaints.

The association says: “When Lehman collapsed, most investors were affected – stockmarkets fell, banks were in trouble and the credit crunch took hold. Some structured products were also affected but of the top 20 complaints to Financial Ombudsman Service, structured products are not even on the list. During the last two years, most complaints about investment products have been about unit-linked bonds, 4,277, investment Isas, 2,522, and with-profit bonds, 2,191. By comparison, there have been 476 complaints about structured products over the last two years. That is less than a quarter.

“More than £9.4bn was invested in stocks and shares Isas in the 2008/09 tax year when Isas accounted for 6 per cent of all complaints about investment and pension products. About £13.9bn was invested in retail structured products in 2009, a sector which accounted for just 1 per cent of complaints.”

However, the advice given on the sale of structured products has also come under the spotlight in the last year.In October 2009, the FSA published its initial results of a review of the advice given for the sale of structured products and also of the quality of the marketing material issues by product issuers.

At the time, it was concerned not only about the quality of advice but also about the systems and controls in place at advisory firms. Its initial results, although from only 11 firms, suggested that 46 per cent of cases reviewed were inappropriate, with only 31 per cent clearly suitable. For the remainder it was unable to come to a clear conclusion.

As a result of the review, the FSA wrote to all plan managers to ask them to review their marketing literature, asked the largest sellers of structured products to review their own sales and referred three of the firms involved in the review for enforcement action with one firm, RSM Tenon, fined £700,000 for significant failings on its sales and advice process for structured products and pension switching.

However, the run of bad news for structured products looks like it is drying up. While Keydata still has many issues to be resolved, several other long running issues look like coming to an end.

The FSA review is due to complete and an FSCS review on whether compensation is due to investors in the five remaining Lehman-backed products not already included in FSCS compensation is due by the end of September.

In addition, the outcome of a judicial review on whether the FSCS levy on investment advisers is fair is also due by the end of the year. And despite all the negative news surrounding structured products, it has actually been a bumper year for sales, with investor demand continuing to grow.

According to figures from, sales of structured products have already hit £9.46bn this year. If the current rate of sales continue, this is comfortably on target to exceed the £12.7bn total for 2009 and has already surpassed the £9bn and £6.8bn respectively for 2007 and 2008.

To meet this growth in demand, the numbers of products issued has also increased noticeably year on year. In 2007 there were 741 plans issued and this rose to 915 in 2009. So far this year there have been 754 issuances and with interest rates on savings accounts still at rock bottom, there is likely to be continued demand as investors continue to seek good returns without the full risk of equity market exposure.

Fair Investment Company reported in February that poor returns on cash were prompting more people to look at the alternatives, with structured products coming out favourably. Its research suggested three-quarters of investors were moving away from cash and into risk-based investments to generate better returns and, of this number, almost half were looking at structured products.

Head of structured product research Julie Smith says: “Nearly half of investors are looking at structured products over any other asset class and there are a number of reasons why this might be. They are popular because they offer a halfway house between low-risk cash savings and full risk stockmarket investing.

“Structured products are not suitable for everyone and anyone considering structures should make sure they understand the product and the risks involved before making a decision. But with the financial climate as it is and the base rate unlikely to increase before the year is out, a diversified investment portfolio including some structured products is certainly worth considering.”

The Bank of England has since kept the base rate on hold at 0.5 per cent and with the rates available for savers still much lower than many people need to provide income, the demand for alternative ways of producing an income are unlikely to disappear any time soon.

George Ladds, head of Investment and Pension Research at Fair Investment Company, says: “Income structured deposit plans are currently offering up to around 4.5 per cent while growth plans can offer more – up to around 6 per cent annually on kickout plans, between 10 per cent and 15 per cent on the maturity of three-year plans and up to 30 per cent on the maturity of five-year plans.

“For investors willing to take a little more risk again for higher returns, income funds are worth consideration. Income funds invest in company bonds and are currently offering returns of between 5 per cent and 8 per cent but, in exchange for potentially higher returns, the risk is that the capital is not guaranteed.

“In this time of low interest rates, investors have to understand that if they are looking for bigger returns, they will have to take more risk.”


Global asset allocators rotate into UK equities

Global asset allocators have taken their most positive stance on UK equities for over three years, according to the latest Bank of America MerrillLynch Fund Manager Survey. In August a net 2 per cent of asset allocators were underweight in UK equities, versus a net 15 per cent underweight in July, the lowest underweight stance […]

Check on DFMs’ use of alternatives

Advisers need to do thorough due diligence on discretionary fund managers and their use of alternative investments, warns Defaqto. In its new guide to alternative investments, Defaqto says more due diligence in relation to use of alternative asset classes is needed with discretionary management services than for multi-manager funds. It says multi-manager funds are more […]

Gartmore suffers net outflows of £1.65bn

Gartmore suffered net outflows of £1.65bn for the first half of the year, more than double its net outflows over the same period last year. This period included the investigation into its star manager Guillaume Rambourg, who eventually left the firm last month. Some £80m of the mutual outflows recorded during July were related to […]


News and expert analysis straight to your inbox

Sign up


There is one comment at the moment, we would love to hear your opinion too.

  1. “currently offering up to around”, sounds a bit vangue to me.

    “offering”, as in some sort of guarantee provided by a ‘big’ bank?

    Pyramid selling with the whole thing upside down balanced on its point?

    Should the FSA be be putting “wealth warnings” on these products? Fools and their money are soon parted and later on we see them complaining because the ‘fund of last resort’ won’t pay out because of some technicality.

    How can PIFs avoid being dragged into the compensation machine for problems others have created?

Leave a comment


Why register with Money Marketing ?

Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm