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Santander letters show structured dilemma

Advocates of structured products are constantly enraged that they are harshly treated by their critics. They are aggrieved that the post-millennium precipice scandal is still used to bemoan the plans, even though the structured product industry has moved on from the badly geared and unrealistic assumptions that caused misery for thousands of investors.

What really gets their backs up is any mention of Keydata.

“That was not about the mechanics of the plans, it was about the link to secondhand American life insurance policies,” they cry.

The latest fury is over the collapse of Lehman Brothers, which had consequences for investors in plans from L&G, Arc and DRL. “Lehman was a once in a lifetime event,” they say.

I suspect structured product providers are not best pleased with the revelation that Santander has written to investors to say it was wrong to label them “guaranteed”. Remember, these guaranteed structured products were used to woo interest rate-starved cash investors to its super Isa paying market-leading rates.

The bank now admits that “the fact that the return on your investment or policy was described as guaranteed does not necessarily mean we can pay you compensation equal to the return you were promised”.

As is a matter of course with financial institutions, the Spanish-owned bank does not think it has done anything very wrong. It boasts it is the only provider that has written to clients, while the rest of the industry still says Financial Services Compensation Scheme cover may apply and refers customers to the FSCS’s website.

It says it is a highly-rated bank that is pretty much safe from insolvency, even hinting that no government would let a bank of its size go under anyway.

All of which misses the point.

Savers did not give two hoots about the FSCS three years ago. The credit crunch changed all that and many consumers now need reassurance that, even in the worst-case scenario, they will get some money back. As one adviser said to me at the height of the financial crisis, clients were not so worried about the return on their money but the return of their money.

There are about 2,000 investors who expected to be covered by the FSCS when their DRL plans went to the wall. They, too, would not have expected a prestigious bank such as Lehman’s to go under but their claims have been rejected. This is despite the plan literature explaining that Lehman Brothers had an A+ credit rating from S&P and AA from Fitch, among the most secure ratings that can be issued and that “in the unlikely event that DRL becomes insolvent, you should contact the FSCS”.

Many investors claim that was enough to persuade them to invest. One Telegraph reader lost £150,000 as a result and is hoping a class action might rescue the situation.

Santander’s conscience is clear because it says few people have phoned in to complain. It has been lucky that its products are performing according to plan. Let’s face it, there have been plenty of plans that have disappointed in the past and had that been the case with its recent issues, the phones lines would have been hot.

The problem is that when a financial heavyweight such as Santander cannot work out when a guarantee is a guarantee then what hope do mainstream investors have? And the structured product fan base wonders why the sector is forever fighting the critics.

Paul Farrow is personal finance editor at the Telegraph Media GroupMoney Marketing


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There are 11 comments at the moment, we would love to hear your opinion too.

  1. MIssold Investor 11th March 2011 at 10:21 am

    I wonder what the FSA is doing in all of this? They investigated in 2004 after the precipice bond SCARP scandal. They investigated again in 2009 after the Lehman SCARP scandal. Now they say they will investigate again! FSA found that structured products are unsuitable for risk-averse investors, but AIFA is pushing back! Last week the FSA said it would be ‘good practice’ for a product brochure to say whether or not the product is covered by FSCS. Is that it??

    There is a common thread running through the precipice and Lehman episodes: NDFA – the same people (but different company) who now design and administer the bulk of retail structured products in the UK. Let’s hope lessons have been learned.

    Just some other points. With Lehman it was 5620 investors with £106m, for whom FSCS was essential as the products were targeted at over-50s who really could not afford to take the risk. The brochures said S&P A+ but this was wrong in many cases as the rating had already fallen whilst the products were being marketed (per recent FOS Meteor ruling)

  2. MIssold Investor | 11 Mar 2011 10:21 am

    ‘……NDFA – the same people (but different company) who now design and administer the bulk of retail structured products in the UK…’

    You might want to get your facts straight on that one.

  3. MIssold Investor 11th March 2011 at 11:45 am

    1) Fundstrategy 26 May 2009 “70% of Britain’s structured product market”
    2) Money Marketing 14 Oct 2009 “The two firms share the same premises in but are separate legal entities”
    3) Companies House filings – the companies were ‘subject to common control from the same shareholders and as such qualify as related parties under Financial Reporting Standard 8’. Management, staff and services were shared and cross-charged in each direction across the companies, according to the accounts.

    Happy to be corrected if this is wrong. Maybe something has changed…

  4. ‘Maybe something has changed….’

    I’d guess that considering you are basing your facts and quotes from 2009, that they probably have…

  5. This is not a problem with the structured product industry, it is a problem with a single provider’s promotion of a product.

    As far as FSCS cover goes there is no reason why a properly arranged deposit based structure should not be covered by the FSCS in the same way that a conventional deposit would be.

    For non-deposit structures a la Lehman it has, as far as I am aware, always been the case that the failure of a bank constitutes an investment risk and therefore any claims under FSCS would have to follow the same route as for any other investment product.

    The requisites for a claim are abundantly clear on the FSCS website. In the event of loss by misselling, which I believe lies at the hub of most investors claims against Lehman product, recourse is there. If the FSCS rules that the investor was not mis-sold then I fail to understand why they should feel they should be compensated. High rewards carry higher risks. If you want to make money you have to be prepared to lose it.

    It might be worth noting that the majority of structured products are issued as senior unsecured debt, meaning that in the event of a bank collapsing they rank above depositors (and a long way above shareholders) in the creditors list, a fact that detractors seem to be either ignorant of, or choose to ignore as being inconvenient. After all where would we be if people realised that deposits carried higher credit risk than structured products?

  6. Austin Hutchinson 11th March 2011 at 4:15 pm

    Structured products can be a valuable asset to a portfolio on the condition that the product is right for that particular client and that the client fully understands the risk.

    As with any portfolio, dont put too much in any one asset class and diversify.

  7. The article does not even mention the main reasons why advisers should not normally be recommending structured products;
    1) nil transparency on charging – are the fees realistic or is it an expensive product – my attempts at Black Scholes option pricing models always show they are extremely expensive but perhaps I am doing it wrong – no independent means of verification available.
    2) client locked in with nil or often poor exit terms on early redemption – don’t tie your clients down!
    3) lock in combined with no reliable method of financial strength assessment of the banking counter party is the real killer.
    Structured products are the last gasp of the ‘bundled product’ floggers hoping to pull the wool over a sufficiently larger number of investors eyes to make a large amount of money for themselves – avoid like the plague.

  8. Further to Mr Kirks comment I feel compelled to reply. I presume Mr Kirk has not really looked into how structures work and is taking dismissive stance on these products a la Hargreaves?

    1. The charges are very clear in all the marketing literature – with an average of 6% being charged implicitly over a 5/6 year period. I would assume that any Unit Trust or mutual fund being used by Mr Kirk over a similar period of time will come out as more expensive?
    2. This is a myth. Whilst structures should be bought as buy to hold, they offer much more liquidity than he gives them credit for. It must also be remembered that structures should not be bought as an alternative to unit trusts and the like, but as a compliment to clients portfolios.
    3. The counterpartry due diligence has improved significantly with a number of providers displaying themes such credit ratings, CDS rates, Capital ratios to name but a few.

    Perhaps Mr Kirk would be wise to look at what is happening in the structured product market instead of total dismissing an area of the market that has been adding value to clients portfolios for years??

  9. I sold these products at Abbey/Santander for many years. We were told they were ‘guaranteed’ and this word could be used with clients (I remember an adviser being told in a sales meeting that she could give her customer a deposit passbook for the equity element. This was quickly forgottent and the adviser pushed out when the complaint came in,of course). This later changed to use the word ‘protected’. Let’s face it Abbey/Santander either don’t even understand the product itself, or are playing a giant con trick with clients and now looking to cover their very exposed backsides !

  10. I have a few claims heading their way.

  11. The total lack of knowledge around SP’s still shocks me at times. Anon comments ‘ Perhaps Mr Kirk would be wise to look at what is happening in the structured product market instead of total dismissing an area of the market that has been adding value to clients portfolios for years??’ sums it up pretty well.
    Perhaps ‘Kirk’ should actually read ‘Laurel’??

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