Fears as structured products make a comeback

Fears as structured products make a comeback

Demand for structured products has increased among advisers who are returning to investments they once shunned as too risky in a bid to protect clients' portfolios from a predicted downturn in stock markets.

Structured products fell deeply from favour with many in the investment community in the aftermath of the financial crisis as the counter parties linked to the products, such as Lehman Brothers, defaulted and capital was lost.

The Financial Conduct Authority has also repeatedly warned about what it sees as the dangers of the products.

Consumer research the regulator carried out in 2015 found retail customers "generally struggle to understand the complex features common to many structured products and frequently overestimate the potential returns available from them".

This, the FCA stated, "can have a negative impact on the quality of their decision-making".

In 2011 then regulator the Financial Services Authority considered re-classifying structured products alongside traded life policies and leveraged exchange traded funds as "generally unsuitable for the mainstream retail market".

It focused on what it called structured capital at risk products - Scarps - a type of structured product in which capital is at risk if the underlying investment falls in value.

In the late 1990s there were problems in this market when these products were sold in volume to customers unwilling to take risk with their capital.

The market downturn in 2003 meant many products matured with capital losses.

Regulatory guidance from 2009, which has not been superseded, is that for appropriate levels of risk no more than 10 per cent of a retail investor’s savings and investments should be held in any single structured product, and no more than 25 per cent of the overall portfolio should be invested in structured products.

As a result of all of the regulatory attention, financial advisers have been very wary of recommending structured products to clients.

But figures released to FTAdviser by Investec, one of the biggest producers of structured products sold in the UK, showed purchases of structured products by financial advisers have increased by 40 per cent in the past year.

Robbie Brigginshaw, head of structured product sales at Investec, said the number one request from financial advisers looking at his firm’s offerings is for structured products that offer protection in a downturn.

Most of the Investec structured products are linked to the performance of the FTSE.

At the same time, wealth management firm Mattioli Woods, which launched a structured products fund in January, said its assets have already reached £123m.

On launching the fund, the company said it has long used structured products in its clients portfolios, but said some clients were finding it difficult to keep track of the investments as they mature, so it took a decision to group them into a fund, so the client is faced with just one investment product.

The company stated they have always used structured products as a way to diversify portfolios and offer protection from volatility.