Structured product providers have hit back after Financial Conduct Authority chief executive Martin Wheatley labelled investments at the more exotic end of the spectrum 'almost like spread bets on steroids'.
In a speech at the London School of Economics, Wheatley said the 'buyer beware' concept had limitations, pointing to the sale of complex structured products, some of which involve 'mind-bogglingly complicated financial gambles' as an area where the idea becomes hard to defend.
He mentioned an example of a six-year term plan linked to the performance of three technology stocks. After six years, if the final price of any of the three shares was below 50% of its initial value, the investor suffered capital loss in line with the worst performing company.
‘Is this product a good deal? Frankly, I’m not convinced,’ said Wheatley. ‘But you can see the attraction.’
Jamie Smith (pictured), chairman of the Structured Product Association, labelled Wheatley's language 'inappropriate'.
‘The designers of structured products follow rules on stress testing and forecasting for every product; rules which the Financial Services Authority provided themselves a year ago,’ he said. ‘These were introduced to ensure consistent standards, and to avoid subjective and personal opinions influencing product robustness. For Mr Wheatley to say it doesn’t look like a good deal to him, just because there’s a chance it might go down, doesn’t make sense.’
Alex Robinson, branch manager of EFG Financial Products (Europe) argued that structured products offered choice and competition to the consumer, and that they were created due to client demands for higher income or capital protection.
‘The benefit to the consumer is they are able to access a volatile area [technology stocks] via a product which provides partial capital protection and defined returns, thereby lowering the risk,’ he said.
However, Adrian Neave, managing director of Gilliat Financial Solutions, said Wheatley was right to raise concerns about the sale of overly complex products to ordinary investors.
‘There have been products in the UK which have not done investors a great service and where they have complex pay-offs: [in those cases] there isn’t an issue with them not being made available to the public,’ he said.