Lookback

Over two-thirds of legal, compliance and business executives at Asia’s biggest financial institutions see a clear need for tighter regulation of structured products sales to the retail sector, especially regarding disclosure and suitability, according to a survey on Asian structured products conducted by law firm Allen & Overy and Complinet. Participants in the survey said that regulators, especially in Hong Kong and Singapore, had been too lax in their supervision of the sale of products such as minibonds and equity-linked notes to retail investors.

Others pointed to a lack of adequate product knowledge among sales staff, and highlighted the need for a clearer separation of banks’ deposit-taking and investment services operations. This, they said, would lower the risk of investors ending up with investments they did not understand.

Respondents were evenly divided on whether Asian regulators had dealt adequately with the fallout from the minibonds crisis. The survey report concluded that the public uproar over deficiencies in the regulation of sales of structured products to retail investors “has been largely defused in Hong Kong through a regulator-driven buyback programme – at no small cost to the financial firms involved – and survey respondents expected investor protection issues to lead the regulatory reform agenda in the region over the next 12 months”.

Nearly three-quarters of those questioned said that stricter regulation of structured products was necessary, with 21% of those polled expressing a “strong desire” for increased regulatory supervision. In line with the call for greater disclosure, 60% of respondents thought that regulators should have done more to regulate the disclosure of structured products for retail. But there was less support for the notion that regulators should be able to govern products at a more hands-on level, such as banning particular classes of products.

Many warned that there was an inevitable risk of ‘moral hazard’ among retail investors, given the rescue initiatives that had been put in place.

The survey was the result of interviews with 54 senior legal, compliance and business executives, representing most of the biggest financial institutions operating in Asia.

Capital protection remains as important as ever, but how much protection do you really need? One statistic to look out for is the one that reveals that the FTSE 100 index has not breached the 50% capital protection barrier over any five-year term since 1984, according to research from Gilliat Financial Solutions.

In the analysis of five-year performance cycles for the FTSE 100 index since January 3, 1984 (the earliest available price for the index), the research showed the incidence of index breaches for various barrier levels. Five-year products using a European-style 50% capital protection barrier showed zero breaches.

Gilliat also looked at the US and European capital protection models and reviewed 50%, 60% and 70% capital protection barriers. The worst-case analysed was the US model with a 70% capital protection barrier. The research found that this would have provided an investor with the full return of their capital in 83.7% of cases. If an investor had invested directly into the FTSE 100 index over the same period of the research, they would have retained their investment capital in only 77.8% of cases.

For those smarting from the bankruptcy of Keydata, Gordon Brown, the UK prime minister, is being petitioned on his official website in a call to preserve Individual Savings Account (ISA) status for products from the bankrupt UK distributor. The deadline to sign up is April 26, 2010 and the prime minister has been petitioned to “help savers who invested in good faith in ISA plans marketed by FSA-regulated firms as being ISA-compliant but which have now been discovered to be non-compliant, by ensuring that Her Majesty’s Revenue and Customs does not remove ISA status from such plans, nor seek repayment of income tax or capital gains tax from such individual savers”.  So far the petition has 12 signatories.

The FTSE 100-linked capital-guaranteed landscape of the UK structured products market is not usually the most exciting place to be, but the events of October have defied tradition by causing more than a raised eyebrow among industry participants. As widely speculated, two distributing providers have gone into administration on the back of their liabilities linked to potential compensation for clients with losses linked to the collapse of Lehman Brothers.

The really bad news is that NDFA was also a plan manager that had scooped up business from Keydata, which was declared defunct in June on the back of tax liabilities. They say lightning doesn’t strike in the same place twice, but unfortunate providers who made the switch will find themselves back at square one, with some rather confused investors.

The Keydata debacle has propelled structured products into parliamentary circles once more as aggrieved investors in potentially non-ISA-compliant investments want to ensure that they are not left liable for the ensuing tax bill. 

In the face of such relentless bad news, some sections of the industry are banding together. Rumour has it that a group of women in structured products in the UK are forming their own association… called Wisp.