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You don't need a structured product

You don't need a structured product

I have one family member who was advised to take out a structured product for his Isa and ended up embroiled in the 2009 Keydata scandal. He has since got his money back. But there is still a bad smell lingering around structured products, and regulators are constantly sniffing. Just this week, the Financial Services Authority fined Santander £1.5m for failures relating to its sales of these products.

The problem is that 'structured' is a euphemism for 'complicated'. Even if you do your due diligence, you still don't really know the innermost workings of these plans. So if you are going to invest in one, you need to know the protection you have if it all goes belly up and you find (in the case of Keydata) that your money has been 'misappropriated' in Luxembourg.

This is where investors assume the Financial Services Compensation Scheme (FSCS) comes in and refunds their money. The problem is that some types of structured products come under FSCS protection, but others don't. You should always check the exact compensation arrangements as there are many different types of structured products and whether compensation is available depends on the way the product has been set up.

Santander structured product customers began to query the extent of FSCS cover towards the end of 2008, but it was January 2010 before Santander clarified the position. During this time, Santander sold approximately £2.7bn of structured products. Tracey McDermott, acting director of enforcement and financial crime at the Financial Services Authority (FSA), said: "Considering that the sale of these products took place between 2008 and 2009, a time of financial uncertainty, Santander should have moved more quickly to confirm under which circumstances FSCS cover would be available."

The FSA's final notice to Santander also reveals what a massive cash cow structured products can be for the banks. According to Martin Bamford, a chartered financial planner with Informed Choice, if Santander received a typical 5 per cent commission on the £2.7bn of structured products sold to customers in this period of a little over one year, it would have generated commissions of around £135m. That makes the fine of £1.5m a token slap on the wrist rather than a true deterrent.

"Banks love selling these products to investors with no or very low appetite for investment risk," he says. "This is probably because structured products are seen as a 'safe' way to participate in stock market returns without risk to capital."

In reality, the capital risk in a structured product is replaced by counterparty risk, where the security of capital is dependent on the financial strength of the provider backing the product.

If you really cannot stomach the risk in equities, with the UK market nearing a high it makes sense to hedge your bets and reduce your risk a little. Here is where structured products can come into their own, and we have recommended a couple in the past. But many sold on the high street are shockingly poor value, offering capped maximum returns that are far from exciting.

One of the more attractive non-high-street options right now is the Meteor Premium Kick-out plan offering a potential 15 per cent a year with five early maturity opportunities. Investment returns are linked to the performance of the top 10 companies (by index-weighting) in the FTSE 100 Index.

Early maturity is triggered on any anniversary when the closing price of at least eight of the 10 shares are equal to or greater than their respective opening level. In this case, capital will be returned in full plus a growth payment of 15 per cent (gross) for each year the plan has been in force.

Your capital is protected as long as the FTSE 100 has not dropped more than 50 per cent after six years and there is a strong counterparty in BNP Paribas (Standard & Poor rating AA-).

But I would still question your motivations for holding this sort of product. There may be different risks here but they are still significant.

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By Moira O'Neill,
22 February 2012

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Moira O'Neill

Moira O'Neill is the Harold Wincott Personal Finance Journalist of the Year for 2012. She has been a finance journalist for 16 years and joined Investors Chronicle in 2008 where she leads the funds and personal finance coverage.

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