The capital markets have staged a remarkable recovery over the past few months. The flip side of this is that the price of market-related risk has reduced substantially, which has a direct impact on the terms available from Structured Products.
As market stress reduces advisers and clients should expect the terms available from Structured Products to reduce accordingly. It is imperative then that, given the chequered past that some structured products have had and, notwithstanding the recent demise of Lehmans and the problems Keydata have encountered, that the industry does everything it can to promote sensible solutions that avoid the need to headline grab.
Headlining products inappropriately to favourably present a plan does not, in my opinion, do the industry any favours and we should make sure that all promotional and marketing literature is presented in an appropriate manner so as to make it initially clear what the product is structured to deliver. Let's face it, we have weathered fairly heavy storms of late, surely we should be seeking some fair weather to brighten the outlook.
Low interest rates and volatility
Interest rates and volatility both remain low which obviously are not good for either capital guaranteed or capital at risk plans. In addition the market price of bank risk continues to fall and we have seen Credit Default Swaps (CDS's) fall dramatically across the market e.g. Barclays have fallen from around 250bps over libor in March to around 80bps over libor now and Citibank from around 600bps over libor to around 225bps over libor now. Whilst Investec Bank does not have a CDS we are no different in terms of funding spreads narrowing. Banks have, for now, managed to shore up their funding gaps and strengthen their capital bases and consequently are now no longer prepared to pay the same rates for funding. We are now seeing the market "re-normalise" in terms of product rates etc, albeit with the exception of some providers of 1 or 2 year fixed rate bonds that still appear to be offering higher than average fixed savings rates.
Consistent product proposition
Given the above it is important that Structured Product providers remain as consistent as possible with their product propositions and not develop overly complicated structures with a view to keeping income coupons, digital pay-offs and participation rates artificially high. The industry currently has great momentum and can only benefit further given current market conditions however needs to be mindful of its recent history and learn from past mistakes.
Our collection of plans
From our first collection launch in May 2008, Investec Structured Products have delivered a wide range of plans on a continuously available basis offering a variety of pay-off profiles across a range of risk profiles. As markets have moved we have adjusted our pay-off profiles and sometimes product structures accordingly, all the while making a conscious effort not to distort the risk profile of our plans. We have not, for example, added more indices to our plans or adapted the averaging period or increased the capital-at-risk barriers with a view to making our plans appear more attractive to the end consumer. We deliver very clear and focused structures where the adviser can be confident that every new collection will broadly follow the previous issue notwithstanding minor changes to the performance elements of each new plan.
Our new Collection is no different and not only delivers 2 new plans, the Guaranteed 5 Year FTSE 100 Roll-Over Plan 1 and the Capital Guaranteed FTSE 100 Plus Income Plan 1, but also includes an additional deposit taker, Lloyds TSB Bank plc on our 2 new Plans plus the Guaranteed 5 Year FTSE 100 Plan 12 offering clients even more choice. Investec Bank plc will continue to operate as Plan Manager across the entire collection however with the 3 Plans mentioned above investors have the choice of an alternative deposit taker, Lloyds TSB Bank plc.
The terms vary slightly and for our 2 new plans are detailed below.
Our new Guaranteed 5 Year Roll-Over Plan offers an annual interest payment of 6.5% (Investec version) or 5% (Lloyds version) for each year that the five day average closing level of the FTSE 100 on each Plan anniversary is higher than the Initial Index Level (IIL). Interest payments will roll-over for each year that the 5 day average closing level of the FTSE 100 is below or equal to the IIL. Any subsequent interest payment will comprise of the relevant interest payment plus the total of all rolled over interest payments that have not already been paid out. The plan is structured as a deposit and offers a full capital guarantee.
The new Capital Guaranteed FTSE 100 Plus Income Plan offers 3 and 5 year options, both of which offer the choice of either Investec Bank plc or Lloyds TSB Bank plc as the deposit taker. The 3 year option offers potential annual payments of 5.05% (Investec version) or 4.25% (Lloyd's version). These payments are made if the Payment Index Level is above the IIL at the end of each income period. The 5 year option offers potential annual payments of 7% (Investec version) or 5.75% (Lloyd's version) with the same payment criteria. Both 3 and 5 year options offer alternative monthly income payment options. Once again this Plan is structured as a deposit and offers a full capital guarantee.
With a plethora of new entrants to the market and an economic backdrop that changes continuously, IFAs need to be confident that new products are being developed in the client's best interests and in a very clear and transparent way. With that in mind and with every new collection, the range of plans we offer continues to evolve never straying from our initial commitments to the IFA marketplace to develop simple, sensible structured solutions on a continuously available basis across a wide variety of risk appetites; on this basis Investec Structured Products continues to deliver.
£1bn business since inception
Considered doing so in 2015
Client communication considerations
Aviva: ‘We are sorry’
FOI from Professional Adviser