It is rare to find a currently available product shrouded in such bewildering negativity as structured products. They have been branded ‘fiendishly complicated’ by some media outlets and carry with them a reputation for being a particularly dangerous investment. The current landscape for structured products, however, does not lend itself well to such disapproval.
The criticism of structured products comes from two angles: their supposed complexity, and their apparent propensity for losing investors money.
A prominent issue behind structured products is the possibility that the counterparty will fail, which would result in the investor losing part or all of the money they invested. It becomes a question, then, as to whether or not an investor believes the bank will collapse. As we know from Lehman Brothers, Keydata and Arch Cru, almost anything is possible, and it is up to the investors to call the likelihood.
How they work
Structured products can generally be categorised in one of three ways: structured deposits, structured capital ‘protected’ products and structured capital-at-risk products.
a) Structured deposits are fixed-term deposit accounts where the return is fixed but instead of an agreed interest rate, it is based on the performance of the underlying asset. At a minimum, these types of products are designed to return investors’ original capital at maturity. These kinds of products – like most regular UK deposit accounts – are protected by the Financial Services Compensation Scheme (FSCS) should the deposit taker become insolvent over the course of the investment term.
b) Structured capital protected products, like structured deposits, are designed to return the original capital at maturity at the very minimum. Returns – including the return of capital – are set out by the issuing institution remaining solvent for the full term of the product. With a capital-protected product, the circumstance under which the capital is not totally protected is the possibility that the issuing institution is declared bankrupt and unable to meet its liabilities. One of the most positive elements of this type of structured product is that, as the name would suggest, the initial sum invested is protected, although this comes with the added risk of inflation eroding the real value of the investment over the investment period.
