Britain’s high street banks have all but left the structured products market, leaving specialist providers to look abroad for counterparties to underpin their offerings.
David Stuff, business development director at Meteor Asset Management, said the decision by many high street banks to close their advisory operations also meant their structured product operations slowed to a standstill, which had direct consequences for third-party distributors.
“What it did was sustain very large structured products businesses in their investment banks,” he said, adding that this meant the banks also worked with independent distributors.
But Mr Stuff said most UK high street banks have now left the sector entirely. “We actually don’t have any structured product that is backed by a UK high street name.”
HSBC remains one of the few to remain active in the market, acting as counterparty to Walker Crips plans.
“The direct consequence of the regulatory environment in the UK is the banks have turned away from this market,” Mr Stuff said.“As one door closes, another opens and what we’re seeing is other banks are stepping in,” he said, adding that most of his firm’s business today is with Swiss, French and American banks.
Another problem facing structured product providers is an environment of lower rates that is making it hard to offer attractive headline rates to investors. Mr Stuff said lower volatility, lower swap rates and tighter bank lending are all making today’s rates less attractive than those available in 2011.
“It has over the past six months, become more benign,” said Marc Chamberlain, executive director of Morgan Stanley IQ, the structured product provider, of the current climate. Bank lending and interest rates remain low and structure pricing relative to cash is in a poorer position than it was at the end of 2012, he said.
This means current investors who are seeing their current structured product plans mature in a rising market could see lower headline rates when they look to invest in new tranches, Mr Chamberlain said, “They’re looking at a replacement but the replacement is a lot less because we can’t get the right price.”
While current rates are low, products reaching maturity have proved successful. And as investors seek more growth at a time when bond yields are low, they are “dipping their toes into the water and going into equities,” Mr Chamberlain said, adding “People are being forced into equities because there isn’t anything else.”
