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Structured products1. Overview of structured productsIn this chapter, we provide a brief overview of the background and development of the market for structured investment products. We also summarise how a structured investment product works, its risks and its suitability.
There is no single common definition of a 'structured product'. They are, by nature, a combination of products or arrangements put together to achieve a specific purpose, whether that be for an individual investor or as a retail investment product available to the general public. Consequently, each offering will have its own unique characteristics.
The aim of the structured product is defined at the outset, and this can be to provide income, capital growth, or a combination of both, over a pre-defined investment term. In recent years, structured products have been available through a wide range of investment vehicles from pooled funds, medium term notes, special purpose vehicles and even deposit wrappers. They may also qualify as permitted investments to be included in standard retail wrappers such as ISAs and pensions. In many cases, though, it is not so much the tax wrapper that is important in determining suitability for an investor (although taxation treatment of that wrapper is always a consideration); it is the underlying investments used within it, what they seek to achieve, and the risks to which ... Shortened demo course. See details at foot of page. ...e raised when PwC discovered that £103 million of investor’s funds had been misappropriated.As a result of the scandal, many investors lost some or all of their capital. Some investors were able to submit claims through the FSCS although, at that time, the maximum claim was capped at £48,000. The problems with Keydata - and the banking crisis as the whole - have severely dented consumer confidence in the financial services sector, and the implications are much more far-reaching than just for the structured products market. Despite these problems, structured products have increased in popularity, with providers coming up with more innovative combinations of underlying asset mixes and a wider range of terms and guarantees. Such was the increase in these product offerings that the London Stock Exchange created a new market segment to accommodate them in May 2005. More providers are designing and marketing new and inventive products. Much of the rising popularity of these products in recent years can be attributed to low interest rates and the increased volatility of stock markets around the world. Structured products offer returns based on the performance of underlying investments. Many products are linked to a stock market index, such as the ...
Shortened demo course. See details at foot of page. ...her asset, such as property, oil or gold). This component is used to provide the potential growth element that investors can receive at maturity. Even if a product offers a form of capital protection, the counterparty can fail, causing investors to lose some or all of their initial investment.
From an advisor's perspective therefore, it is wise to recommend that any investmen... Shortened demo course. See details at foot of page. ...nal funds invested at the end of the term, unless the index or asset price to which the product is linked has dropped below a predetermined threshold. If this happens, investors can quickly lose some or all of their original investment. These are similar to structured capital-at-risk products, except that they are delivered in deposit, rather than security format; a ...
Shortened demo course. See details at foot of page. ...pays a fixed or variable rate of interest, investors’ returns will depend on the performance of a stock market index or asset.We will discuss the risks associated with structured products in more detail in Chapter 4. At this point, we shall simply introduce some of the risks or limitations to which investors can be exposed. The following list is not exhaustive and not all risks or features are applicable to each type of product. Counterparty risk – a product may be designed and marketed by a ‘plan manager’, but the returns and guarantees are usually provided by a third ... Shortened demo course. See details at foot of page. ...vent full exposure to any gainsLimited participation – many products only offer a proportion (for example 50%) of any gains made by the index or asset to which they are linked Tax – the tax treatment of structured products depends on their legal structure and on any tax wrapper in which the product is held. Tax legislation can change during the term of the product and this could have a detrimental effect on the eventual returns received by the investor So, in summary, what are the reasons for investing in struct... Shortened demo course. See details at foot of page. ...askets of assetsDefined returns Defined maturity dates Structured products can be provided to provide income, capital growth, or a combination of both Some structured products offer full capital protection, whilst others offer partial or no capital protection at all ... Shortened demo course. See details at foot of page. ...y deposits, as opposed to packaged investment productsStructured deposits are often marketed as ‘guaranteed equity bonds’ There are various risks and limitations associated with structured products |
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