Credit ratings, financial strength, CDS spreads, the Financial Services Compensation Scheme...these are all terms readers will no doubt be all too familiar with.
What a change from only 18 months ago when investing was all about past and future performance, alternative investments and innovative portfolio construction.
Today's priorities for the investing public seem to centre around capital guarantees and preservation of wealth (or what's left of it) and finding investments that can deliver returns in excess of cash.
Some would argue that it shouldn't be too difficult given the exceptionally low rates available for savers in the current climate, however investments/deposits delivering reasonable single figure returns over the medium term would appear to be very much back in vogue. But should they have ever left?
Structured products have been, and very much are, a benefactor of current market conditions. However, I do think often think it is a great pity it has taken such extraordinary circumstances - effectively backing advisers and their clients into a corner - to highlight the benefits many of these structured solutions are able to offer.
This renewed interest has obviously brought with it many questions focusing mainly on credit ratings closely followed by when and if the FSCS will apply. This column has already focused on credit ratings in previous weeks so I would like to deal with the latter point, the FSCS, which, I am discovering every day, is hugely misunderstood.
The FSCS is the UK's compensation fund of last resort for customers of financial services firms authorised by the FSA or previous financial regulators. It can pay compensation to consumers if an authorised firm is unable, or likely to be unable, to pay claims against it and so is declared in "default".
The FSCS protects deposits, life and general insurance firms, investment business, home finance advice and general insurance policies advice. To qualify for compensation, investors need to be eligible under the FSCS rules, which are made by the FSA. There are limits on the amount of compensation payable dependant, initially, on whether financial loss has occurred. How the scheme relates to structured products differs depending on how a particular product has been structured.
There are many different types of structured products. However, the majority fall into two main categories: deposits or investments.
Investment plans tend to be structured using Medium Term Notes (MTNs) therefore, for the purposes of this blog, I have focused only on this type of structure.
Investec Structured Products offer both deposit and MTN based products so it is important that I explain how the FSCS relates to each structure in turn.
Firstly, let's deal with our deposit structures or, as we call them, our Accumulation Plans. All are structured deposits and are therefore automatically covered by the FSCS up to £50,000.
But our investment plans are structured using MTN's, where Investec Bank acts as plan manager and Investec Finance is the note issuer. Should either party to the contract fail - maybe through insolvency - the customer would have no recourse to the FSCS. If however Investec Bank was to breach an applicable FSA rule, for example by misappropriating funds, then arguably there may be reasonable grounds for a claim, however this scenario is so unlikely it would be misleading to use it as an example for a possible future claim.
Once again, our adviser and client-facing literature makes this point very clear. It is important to note the insolvency of either a plan manager or counterparty to any contract would not in itself constitute a claim under the FSCS.
I would reiterate the point I seem to make time and time again, which is investor protection is only one part of the structured products jigsaw and it should be used appropriately together with all other relevant factors, not relied upon as a get out of jail free card.
Given the mess the structured products industry was in a few years ago, I would strongly urge IFAs to make sure they are aware of the full facts not only relating to any particular product, its distributor and counterparty, but also relating to the levels of protection which may be afforded to an investor so as to avoid another product scandal similar to that created by the precipice bond debacle.
Gary Dale is head of intermediary sales at Investec Structured ProductsIFAonline
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