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Structured products: A danger to agile instruments

Structured products: A danger to agile instruments

If the FSA makes structured product providers jump through too many hoops, it is in danger of crippling the market’s flexibility and hallmark innovativeness, writes Ian Lowes, founder of

The publication of the Financial Services Authority’s (FSA) Retail Product Development and Governance – Structured Product Review paper last month brought no real surprise, generally following through from the original guidance published last year.

The document focuses on the key issues of governance that arise in the development and marketing of structured products, and is a logical progression from the review the FSA conducted into the Quality of Advice on Structured Investment Products paper in 2009. It also reflects the stated aim of the new Financial Conduct Authority (FCA) that it will be proactive rather than reactive in its monitoring of and guidance to the financial services industry.

A fair deal for consumers

It is doubtful that anyone would disagree with the comments made by Martin Wheatley, managing director of the FSA, in March, when he said in the foreword of the Retail Conduct Risk Outlook paper that for a consumer to receive a fair deal from the financial services industry, the way firms are structured, how they operate, the products they develop and how they are sold must all be aligned with their customers’ needs.

Likewise, the basic process that the FSA outlined in the latest paper and which it has stated should be followed in the structured products market, namely identifying the target market, stress-testing products, ensuring a robust product approval process and monitoring the product throughout its life-cycle, are all reasonable and are expectations that should hold true for all investments, not just structured products.

Concerns for agility

But a key area of concern is that the FSA’s guidance could hinder structured product providers from responding with agility to fast-changing market conditions.

One of the benefits of structured products is their ability to react quickly to market movements and to enhance or protect investments depending on the investor’s financial goals and attitude to risk. The terms these products offer are largely dependent on the manufacturers’ ability to take advantage of pricing movements in the market.

Structured products have windows of opportunity and so are launched in tranches with specific open periods and end dates for investment. Creating a longer lead-in time by making providers jump through too many hoops could slow down the structuring process to the extent that they are unable to lock in the pricing needed to make them competitive. The end result would be fewer products issued and reduced choice for investors.

Risk to innovation

Likewise, the innovative structuring that can occur as a consequence of pricing movements enables the market to deliver a range of outcomes for investors, from geared returns and 100% capital-protected investments to defensive digitals that will deliver positive returns even when the index is falling. This diversity provides valuable options that can help to balance an investment portfolio.

Such innovation, which has been a positive hallmark of the structured products sector, should not be stifled. 

The FSA knows structured products are becoming more popular. Advisers are using them more readily and as more of them research and assess these products, the more the products will be used, further driving growth in the market. Therefore, these issues should be addressed sooner rather than later.

Wide target market

The market for structured products is wide and includes: banks selling in-house products through their branches; IFA distribution; and discretionary managers at the bespoke end. The FSA has said it is important for providers to have their target market firmly in mind and to ensure the products are suitable for that market.

However, there is a large range of products that are appropriate for different investors so it is unlikely it will ever be objectively clear which products are appropriate for which investors. There will always be a degree of subjective  opinion.

The structured product market has always been responsive to FSA guidance, and considerable time and resource has gone into developing, improving and educating the market. Providers will undoubtedly consider the issues raised in the latest review, compare their product governance to the guidance set out, and address all the areas for improvement that they identify as a result.

Let us hope that in the process the market’s capability for innovation is not stymied to the detriment of providers, advisers and consumers.

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