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‘We want to replace views with facts’

Structured product provider Incapital Europe dismissed adviser “misconceptions” about the sector during an industry debate in London last week.

The debate was hosted by Incapital Europe managing director Chris Taylor at London’s Athenaeum Hotel and included Which? principal policy adviser for financial services Dominic Lindley, Institute of Financial Planning chief executive Nick Cann and IFAs.

It followed a nationwide series of structured product master classes run by Incapital in conjunction with the IFP, which drew a total of 920 IFAs.

Taylor said: “There are some deeply entrenched views but we suggest that some of the views are a little bit instinct-based. We wanted to replace these views with facts, not dogma or misinformation.”

The comments come as the industry battles to rid itself of reputational damage that has been done by product failures over the past decade.

The first was the proliferation of so-called precipice bonds in the 1990s, which offered attractive returns but threatened to lose all or most of investors’ money if stockmarket thresholds were breached. Several products did breach their precipices when the TMT bubble burst in 2000, losing investors millions.

More recently, providers Arc, NDF, DRL Investors and Meteor Asset Management sold thousands of products that relied on US investment bank Lehman Brothers as counterparty. When the firm collapsed, many of the investors sustained significant losses that look unlikely ever to be repaid.

The industry’s reputation has also been damaged by the collapse of structured product provider Keydata and its subsequent association with misappropriation of assets and exposure to troubled traded life settlement bonds.

Taylor last week urged IFAs to recognise that not all structured products are the same, saying while most criticisms can be valid for some products, none is valid for all.

He said several myths prevail about the products, including a belief that it is impossible for an investment to deliver equity returns without equity risks.

He said: “We can in the structured industry remove market risk totally – it will clearly be replaced by credit exposure and counterparty exposure.”

Taylor pointed out that investors may not realise that when they place cash on deposit in a bank above the Government’s £50,000 compensation limit they are taking on counterparty risk.

He also accused the mutual fund industry of propagating myths about its own abilities, such as the suggestion that risks can be controlled through diversification and time.

He said no amount of diversification controlled risk during the financial crisis of 2008, when all asset classes fell indiscriminately and funds followed suit.

He said the mutual fund industry has also suggested that the only winners from structured product investment are investment banks. They act as the counterparties to the products and trade the various derivatives required to achieve the rates of return targeted by the products.

Taylor said this is “nonsense” as the investment banks trade with “no market view”. He said once a structured product is launched, the investment bank takes on all responsibility to deliver the product’s stated return targets, including trading derivatives.

Only if the investment bank collapses completely can it avoid paying out because the investment bank takes on the risks associated with the actual trading, he added.

Which?’s Lindley spoke just a few weeks after the consumer advice group labelled structured products as one of the 10 worst financial products that consumers can buy.

He said: “Consumers by and large do not really understand investment, they do not really understand risk but they do not want to lose their capital. I struggle to think that they would want to take on a risk that if the FTSE falls below a certain value then they will just get their original value back.”

Lindley added that structured products should never be sold without the advice of an intermediary, hitting out at high-street banks that sell “guaranteed deposit”-type investments.

Cann said that knowledge of structured products will be vital for IFAs under the retail distribution review.

He said: “If you are going to be an independent financial adviser, whatever that might look like in 2013, you will need a proper understanding of the assets in different asset clases to use them or not use them. They will have to be able to explain to clients why not if they choose not to use them.”

Yellowtail Financial Planning director Dennis Hall added he had visited an Incapital structured product master class but, while remaining open-minded, he is still unconvinced.

He said: “I am still not ready to put my clients in there but I am a lot closer. I do not think that there is enough information out there to educate me enough.”
Incapital also issued the findings of entry and exit survey of 840 of the IFAs attending the master classes, which suggest education on structured products can change advisers’ minds.

The research shows that, on the way in, 83 per cent say they would use structured products but on the way out that figure is 98 per cent.

The number of IFAs who consider all products to be the same fell from 10 per cent to 2 per cent, and the number who think they could explain counterparty risk to investors rose from 53 to 90 per cent. When asked if structured products might add value for investors, 84 per cent said yes on the way in to the master classes but 97 per cent said yes on the way out and the number who think they are overly complex fell from 45 to 16 per cent.

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  1. Thanks for mentioning the NDFA / ARC / DRL / Meteor products that failed when their counterparty Lehman collapsed two years ago. 6000 UK retail savers lost their savings. Anyone caught up in this can contact the Lehman action group at http://www.missoldinvestments.co.uk

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