Misselling Claims Still Under Review

Investors are still awaiting results of a regulatory review of the UK structured products market instigated by the collapse of Lehman’s Brother Bank.

The review is running under the auspices of the Financial Services Authority, Financial Ombudsman Service and Office of Fair Trading after misselling claims were raised in Parliament.

They are looking to see if investors‘ claims for losing cash should be dealt with by the ombudsman or whether other action to regulate the structured products market is required.

“The inquiry is ongoing,” said an FSA spokesman. “At the moment we have no end date set and can’t discuss the matters under consideration.”

Structured products are investments that are tailored to give income, capital growth or a mixture of both.

Investors will tie up cash in the short to medium term - generally between a year and 10 years. 

The workings of structured products are complex investment vehicles with potential risks and high returns - but because of the potential return, the risk of losing all or part of the cash put in to the investment is high.

Despite the investment risk and uncertainty of the future of the UK structured products market, the UK market jumped by 25% to £9.68 billion year on year, based on a report by Structured Products magazine.

Investors seeking better returns on their cash as stock markets and interest rates collapsed drove the increase.

This understandable as a structured product provides opportunities other investments do not, like giving access to investments beyond UK stocks and bonds.

Structured products offer returns linked to the performance of an underlying benchmark like interest rates, equity markets, foreign exchange markets or corporate credits, often via a derivative designed to achieve capital growth coupled with a note that pays interest.

The terms and conditions of the investment are generally clear along with them payout options, but because many structured products carry risk, investors can easily lose money.

Investment firms try to overcome this by offering capital protection. Full protection aims to at least cover the investment at the end of the term. Partial protection (SCARPS - structured capital at risk products) also aims to offer the full original investment back at the end of the term unless the derivative has sunk below a predetermined threshold.

Some of the key points to watch for in a structured product are:

• Suppliers acting on behalf of a provider often offer structured products. If the provider fails, the Financial Services Compensation Scheme may not cover the investment.
• If the return on an investment depends on the performance of the underlying derivative then a falling market can quickly wipe out the original investment
• Pulling money out of the investment before the end of the term is often costly and benefits like capital protection are generally only apply for the full term.
• No dividends are paid even if the investment is linked to the performance of a stock market
• If you pick a winner, many structured products have a capped return that means once the investment breaks through that threshold the holder receives no additional return.
• Providers sometimes employ averaging across the life of the investment. This is a double-edged sword that can reduce losses but also restrict gains.
• Inflation is not a big issue currently, but over the term of an investment, even a 100% capital protected investment is advertised, the real value is not protected.
• Tax is chargeable on some structured product profits

Another type of structured product is offered by deposit taking banks and building societies and often marketed as a ‘guaranteed investment bond’.  Before paying any money in to one of these schemes, check out what will happen to the cash if the bank or building society fails, because the investment may not have protection under the Financial Services Compensation Scheme.

Investors should also check the cash they have on deposit with a bank or building society does not exceed the FSCS limits - for instance cash on deposit can breach the scheme limits even if split among several banks as they may all operate under the same licence and FSCS applies to all the accounts held under a single licence, not all accounts at separate brands run under the licence.

The new FSA rules banning commission payments to financial advisors from 2012 is expected to allow to open the market to more complex investments like structured investments, but it is imperative anyone seeking information about complicated or niche investments should check out their advisor has a track record in the sector.