So the rumours have finally come to fruition with NDFA Limited and DRL, both distributors of Lehman backed Structured Products have filed for administration, neither of which were wholly unexpected.
According to Grant Thornton both companies, which were linked by common ownership, made the decision in view of "large potential contingent liabilities". Data from Structured Retail Products shows DRL, a relative newcomer to the structured products scene, which distributed products issued by third parties, sold an estimated £150m of Lehman-issued products, while NDFA's contribution was a more modest £23m. Given that the combined totals represent a mere 1.5% of the c£12bn of Structured Products sold in 2009 so far, it is important to keep this issue in perspective. Admittedly, if you are one of the advisers with clients affected, you are probably not that interested in this type of statistic however I think it's definitely worth bearing in mind. There are of course other firms that may be potentially affected by the reviews being conducted by the Financial Ombudsman Service (FOS) and Financial Services Authority (FSA) however this is still not clear as the regulator will not comment on individual firms.
Following this announcement I have myself fielded a number of calls from advisers who have become nervous yet again with what, on the face of it, appears to be another backward step for the industry. My response to these concerns is very simple, this is not another issue that faces the industry but merely the result of the reviews carried out by the FSA and FOS following the collapse of Lehmans in 2008...over a year ago! The Structured Products industry has gone through a very tough time since then dealing with not only the huge issues of counterparty risk, the banking crisis and in my opinion the misplaced importance by many upon factors such as credit ratings, CDS's and the like, but also falling interest rates and the hugely unpredictable equity market volatility. We have weathered this unprecedented storm and have arrived in a much better place. Admittedly there are now fewer providers and I believe that the numbers will fall further however I also believe that this is not necessarily a bad thing. Proprietary issuance is undoubtedly where I believe the industry is heading towards which, given my own position, is encouraging not to mention just a little comforting!
We should all be mindful of the positives behind the momentum driving the renaissance the industry is currently experiencing and not let ourselves get sucked into the negative press surrounding very specific issues. At the beginning of the year I predicted the market size to top £20bn, an increase of over 100% on 2008, and I still stand by that prediction. Clearly there are now more and more advisers using Structured Products with more of their clients which means as providers, we are obviously getting something right.
Gary Dale is Head of Intermediary Sales at Investec Structured Products. These are his views and not to be taken as representative of Investec.
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