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Structured deposit commission ‘muddies RDR waters’

Advisers say commission-paying structured deposit products are a “grey area” which are “muddying the waters” of the RDR.

Structured deposits are a type of structured product which offer returns linked to the performance of an underlying measure such as the FTSE. Unlike structured investments, they are capital protected and covered by the Financial Services Compensation Scheme, and do not fall under the RDR.

Investec and Societe Generale, do not pay commission on structured deposits.

Legal & General currently offers a six-year growth deposit bond linked to the FTSE 100 which pays 3 per cent upfront commission, with no ongoing commission. L&G says it “makes sense” to continue offer commission where it remains payable.

Gilliat does not currently offer commission on structured deposits, but plans to do so in future. Both providers give advisers the option to sacrifice commission, which would be rebated to the client, and charge a fee instead.

Informed Choice managing director Martin Bamford says structured deposits are a “grey area”.

He says: “Since the RDR came into force there are certainly loopholes and areas the FCA may have missed, and with products still being promoted on a commission basis there is a worry about commission bias.”

The FCA says structured deposits are excluded from the RDR because they are considered to be banking rather than investment products.

But Aurora Financial Planning chartered financial planner Aj Somal says: “These products are investment-linked and still carry an element of risk. The current rules muddy the waters.”

D&W Management Consulting director Richard Leeson says: “Structured deposits compete very much in the investment arena.”

Last week, L&G’s head of structured solutions James Harrington was made redundant, following a decline in structured product sales over the past year.

L&G’s structured product sales fell by 75 per cent between 2011 and 2012, from £102m to £25m. A spokesman says there has been a “further slight decline” since then.


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There are 3 comments at the moment, we would love to hear your opinion too.

  1. Considering that around 85% of the investment goes into a fixed term deposit (with a smaller percentage going into performance part of the investment), doesn’t that 3% seem a bit high?

  2. When Structured Products paid advisers commission is was much fairer for the customer. If a product promised a minimum of return of capital given certain conditions then that’s what the customer got. Now it’s capital return less the cost of the advice. In fairness to customers these products should be allowed to reintroduce commission for advisers so that capital return means capital return and not capital return less adviser fee!

  3. Commission on structured products is one of the post RDR anomalies. Not all providers pay commission – some have chosen to only offer factory gate prices on products – and in time it would not be surprising if the rest of the market moves that way.

    I second Clive’s comments re investor understanding. Contrary to the negative hype put about around structured products – they are not overly complex vehicles for investors to understand. We have been using structured products in client portfolios for many years and the premise of a product offering…

    * a defined payment outcome
    * after a set amount of time
    * in defined circumstances

    … is one they have no trouble grasping.

    The quotes from product literature in this article are taken somewhat out of context and do not reflect the clarity of structured deposit brochures currently distributed by IFAs.

    I struggle to understand how a product offering, say, “4.3 times the growth in the FTSE 100, capped at 43%” with two clearly defined dates on which this movement is observed, can be seen to be a ‘complex’ investment. Alternatively, a structured deposit may offer a fixed and clearly stated gain if the FTSE 100 is higher after five years, with capital returned if this is not the case. It is nonsensical to state that this is a complex scenario.

    No-one would suggest that structured deposits are the same as deposit accounts and for strict deposit account savers the purchase process will not be the same because there is greater risk involved and that does require greater understanding. But faced with an interest rate on a cash deposit account interest rate of 1.25% with CPI at 2.7%, utilising a simple structured deposit which can sacrifice the low interest in return for nearer 5% or more a year might make that a worthwhile exercise for some deposit capital.

    If an adviser is recommending a product based on commission that is the fault of the adviser, not the product but that’s not to say they wouldn’t have charged a non-recoverable fee otherwise

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