At first glance the UK structured product world has taken another serious blow due to the various issues surrounding the collapse of Keydata. But are structured products to blame?
Culpability aside, Keydata’s demise has highlighted the uncertainty around the services provided to the market. In some instances Keydata’s primary role was one of third party administrator to providers; in others Keydata was the provider, but not the promoter; sometimes it was all three.
There are lessons to be learnt - by both buyers and providers - from this. While Lehman Brothers’ collapse focused minds on the counterparty risk, few heeded warnings about the important ‘provider risk’. Surely that will now change. But the key problem - that when you slice through a product it often bleeds a whole rainbow of names – remains.
Clearly it is a sub-optimal situation when a product’s promoter, provider, administrator and issuer are not the same company, a situation that can also be found in the fund arena. Little wonder that retail structured products receive a bad press for being overly complicated (although I doubt this is necessarily what is meant when commentators level that particular accusation against them).
Keydata’s failure means that, once again, advisers must invest precious time understanding the roles the disparate parties play and what protection is available at each stage in the process. Does the average investor understand the risks of buying a product with multiple companies attached to it? Delving into the hidden risks of investments which so proudly declare themselves 'protected' is simply not on the agenda of most people.
In what may be a significant development, the FSA recently concluded a consultation period on the regulatory status of structured investment plans. There was no hint that structured products would be ‘banned’ – possibly explaining why the consultation passed largely unreported – but it is noteworthy that the regulator included a number of proposals to improve the hygiene factor around the assembly of structured products.
In my view the industry should embrace any change which improves the overall transparency and therefore the reputation of products which could, and should, have a much bigger role to play in investor portfolios.
Colin Dickie is a director at Barclays Wealth
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