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Admittedly, structured product providers always have had their work cut out convincing IFAs that they deserved a credible place in client portfolios.

The products invest in a select basket of stocks with a kick-out feature to cap performance and a degree of capital guarantee that could provide sub-deposit account rates of return – and it is clear to see why advisers are hesitant, particularly in a weakening market.

However, with Northern Rock’s nationalisation sending cautious consumers scurrying to put cash under the mattress and the stock market’s bumpy ride making investors queasy, it was not long until rumours of structured products as an easy sell started to circulate.

Anthony Coyte, chartered financial planner and head of the investment steering group at AWD Group, says: “We have always been concerned with selling structured products with words such as ‘capped’ or ‘safe’ or ‘capital protected’. When you are talking to a cautious client, for them if they lose money in part or full from a product, that isn’t a cautious investment. That one hiccup is the end of your relationship with them and the beginning of potential complaints.”

As the credit crunch seized global financial markets, structured products soared in popularity – online resource Structured Retail Products claims the European market experienced “a watershed last year” and is still likely to reach €1trn (£56bn) by Christmas – as investors sought to hedge downside risk while remaining invested in equities. This piqued the interest of the IMA, which lambasted the providers for a lack of transparency a week before Lehman Brothers’ sudden collapse.

Lehman Brothers had launched several own-brand products but provided the counterparty underwriting for many more. On 15 September, when Lehman Brothers filed for Chapter 11 bankruptcy protection in the US, structured product providers such as Arc Fund Management, NDF Administration and Meteor Asset Management found they were also affected.

Trusting the S&P A-rating of the global bank, these providers, and subsequently the advisers that sold the products to risk-averse clients, dared to think the unthinkable – Lehmans and potentially other large American banks could go bust, triggering a default on the medium-term note and ultimately eliminating the capital protection investors believed they had.

Arc, which has four plans currently in issue with Lehman Brothers as counterparty, said in a statement: “We have very little concrete information and do not yet know if Lehman Brothers will be able to meet its obligations in respect to the investments arranged with them. However, we do understand that the UK subsidiary of Lehman Brothers with whom the investments were arranged, has not been able to make payments of income from any investments since 15 September 2008.”

It continued, stating that under present circumstances with the monthly income version of its Fixed Income Plan 6 it is “unlikely income payments will be paid, at least in the short term”. Arc added that investors would not be able to cash in an existing Plan underwritten by Lehman Brothers until the UK and US administrators clarify the position. Its other plans affected are Stepped Kick Out Plan 5, Bull & Bear Enhanced Investment Plan 3 and Protected Commodity Plan.

Much to the chagrin of advisers and their structured product investors, the Financial Services Compensation Scheme has remained tight-lipped about whether clients who lose money specifically due to Lehman Brothers’ implosion may be entitled to any right of return. After all, it doubtlessly will point out, the FSA requires all structured providers to have been clear about counterparty risk in their literature and dealings with intermediaries.

However, while a counterparty risk must be noted, the FSA does not require providers to disclose the name or any details of that counterparty – a “loophole” that is making it tougher for advisers to discover whether structured products held by their clients have any exposure to the Lehman Brothers fallout.

John Beale, marketing director for Shropshire-based IFA Pi Financial Dixon Sutcliffe, believes at least partial blame must lie with the rating agencies. He says: “Some of the products will say who the counterparty is but others will say ‘this is backed by notes from an AA-rated bank’, but not actually say which. It is the ratings agencies that advisers rely on, at the end of the day. There is only so far the adviser can dig and at some point they have to draw a line in the sand. You do not expect a good rating to then blow up in your face.”

Data supplied by rating agency Standard & Poor’s shows Lehman Brothers slid from an A+/Stable rating to A+/Negative rating on 21 March this year, signifying that the rating may be downgraded. After a decade as an A-rated institution, it was not until Lehman Brothers submitted to Chapter 11 status that S&P re-rated the company as “R”, a rating which means the institution is under regulatory supervision owing to its financial condition.

The rating A “watch” was only put on the company by S&P six days previously.

While IFAs writing structured product business may have caused a few “raised eyebrows” from underwriters, Neil Pointon, chief executive of PYV, a PI insurer for IFAs, says the softness of the PI market has meant there were few repercussions. However, with Lehman Brothers’ collapse and the ramifications for end-investors still unresolved, Mr Pointon believes underwriters’ view of structured product business is likely to harden.

In turn, that could mean higher premiums for advisers who legitimately conduct structured product business and more paperwork for those who dabble in it.

Mike Baughan, senior partnerof Buckinghamshire-based IFA Chessman & Partners, says: “We have done very few structured products because if we don’t understand them and what is underlying them, then how are clients expected to understand them?”

Could what started as distrust among advisers and migrated into concern about credit-worthy counterparties seriously damage the structured product market? Mr Astley is sanguine. He says: “Precipice bonds had a geared downside, offering higher returns for higher risk and the market moved against them. Now we have 50 per cent capital secured products regardless of what happens and I think the products are slightly more sophisticated and provide attractive returns.

“There was always the element of counterparty risk. The whole financial infrastructure of the world is being affected and structured products are a very small part of that.”

Anna Lawlor is deputy features editor of Investment Adviser