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Gaps in EU safety net for structured products: ESMA

Gaps in EU safety net for structured products: ESMA

European retail investors have been snapping up structured products but not all countries have proper regulation of either the product or the advice, an international advisory firm has warned.

Latest data from the European Securities and Markets Authority revealed that 1.3m structured retail products were sold in 2014 across Europe.

This took the total number of products outstanding to 2.26m by the end of 2014.

In monetary terms, European investors had approximately €647.4bn (£477.8bn) in structured products waiting to mature at the end of last year, according to ESMA’s Trends, Risks and Vulnerabilities in Financial Markets report.

However, the unmonitored sale of structured products by often unqualified product salespeople to investors is a potential disaster in the making, according to David Norton, head of investments for international wealth management firm AES International.

In some parts of Europe, such as the UK, the sale of structured products is relatively closely monitored by regulators. However, in other areas of Europe and beyond, Mr Norton said that many of those selling these products were completely unqualified and ill-equipped to explain the full risks of the products investors were buying.

This includes many of those working in banks and those who claimed to be able to offer financial advice.

Mr Norton said: “Structured products help manage specific risks at an institutional level, but are complex instruments and are rarely suitable for retail investors.

“There are many people who are completely unaware of how complex the products they own are and therefore the risks inherent in them. The risk is not always that the investor will lose money, it is rather that the returns are nowhere near what they expected.”

He added that terms such as ‘protection barriers’ and ‘capital guarantees’ could give a false impression of what was offered and when such terms were badly explained, he said the “consequences can be disastrous”.

In the UK, there is a Structured Products Association, which aims to provide information and detail about clean products with easily explained outcomes.

Right to Reply

Ian Lowes, founder of Newcastle-based StructuredProductReview.com, said: “While I am aware of some pretty horrendous contracts being pushed by unqualified salespeople in unregulated territories I am surprised to hear of such practices going on in the EU. The market in Europe has always been significantly bigger than the UK for as long as I can remember and I perhaps naively thought that it was therefore more mature.”