Full capital protection for Cater Allen's structured products

While French bank Société Générale benefited from buying the quintessentially English Hambros Bank, boosting its British credentials in the process, Cater Allen is another English name that is now allied to a large foreign bank - in this case, the UK division of Spain's Santander, which acts as the sole counterparty for Cater Allen's products.

"Being a wholly owned subsidiary of Santander UK is a big advantage," says Jonathan Banks, structured products manager at Cater Allen in London. "It provides clarity with regard to our counterparty, and while Cater Allen has its own banking licence, Santander UK fully and unconditionally guarantees all deposits."

Santander manages the hedging and derivatives elements of Cater Allen's structured products, while the research, design, pricing and stress-testing is all done in-house at the private bank. "The strength and security of Santander UK and its role as counterparty provides additional peace of mind to investors in today's difficult market conditions," says Banks.

Throughout the financial crisis, Cater Allen's philosophy has remained consistent. The company focuses on clients who are interested primarily in keeping their capital safe, and this year has moved from selling 100% capital-protected structured products to marketing only structured deposits.

"We like safety and security here - it's what works for our clients," explains Banks. "The great thing is we haven't seen a dip in demand for our products - they're very popular. People want to preserve their cash. They don't want a huge return if it means risking their money. We're more than happy to provide solutions for that.

Education as a whole is probably the key thing - we're trying to be very open about how these products are put together

"We're always looking at other options, and obviously we see that a lot of the market does issue capital-at-risk products, but right now we're happy to continue providing just the protected plans."

Cater Allen markets three types of structured deposit. First are the basic growth plans, such as the 3¾-Year Growth Plan 15, which provides full participation in the upside of the FTSE 100 up to a cap of 26% - a consequence of the short investment term - and is aimed at investors who are bullish about the market.

Second are the enhanced growth plans, currently on issue 14. The latest of these structured deposits gives investors 150% participation in the growth of the FTSE 100 subject to a cap of 50% on gross returns. It uses a monthly average during the final year of the six-year term to minimise the effects of any market volatility.

Finally, this year saw the launch of the sixth issue of the bank's six-year Annual Locked-In Return, which has proved its most popular offering, perhaps signalling just how wary of market movements investors are.

"The annual lock-in is attractive because if the market is flat or slightly up for the first four years of the six-year term and markets then drop, you have locked in four coupons to be paid at maturity. So at 6.5%, you would have had 26% on top of capital at maturity."

All of Cater Allen's structured deposits are linked to the FTSE 100. The UK benchmark index is the most attractive underlying because investors are so comfortable with it, says Banks. "We like using the FTSE 100 because it's great for UK investors to keep up with - you can find its current level in any newspaper, and it means investors can check the underlying of their plan every step of the way."

Looking ahead, making products transparent and ensuring independent financial advisers (IFAs) and investors fully understand them will be two of the most important factors when selling products, according to Banks.

"Education as a whole is probably the key thing - we're trying to be very open about how these products are put together and to make sure IFAs have a full understanding of how they actually work."

The UK Financial Services Authority's Retail Distribution Review (RDR), which takes effect in the UK on December 31, bans commission for advisers on structured products, but not on structured deposits.

Although this is at odds with the rest of the European Union, the discrepancy is expected to be ironed out by the European Commission's Markets in Financial Instruments Directive II, which is likely to be implemented in 2014. In the meantime, says Banks, sales of structured deposits could increase, precisely because advisers can still collect commission on them.

All of Cater Allen's other products are structured with commission built in, except for the 3¾-Year Growth Plan 15, which is structured with the adviser charging model in mind and has no built-in commission.

"Some IFAs have already moved to a complete fee-advice model, so it made sense to test the water before the RDR came in," says Banks. "This is something we'll continue to do next year - release products that pay commission and products that don't - to serve the different adviser models out there."