Every so often, so-called structured investments hit the news. And it’s never for the right reasons.
They’re back in the headlines again, after Yorkshire Building Society was fined £1.4m by the Financial Conduct Authority (FCA) for exaggerating the returns its customers could expect from its stock market-linked bonds.
Credit Suisse, which designed the bonds, was fined £2.4m.
Yorkshire Fails
Structured products target older savers who are desperate to beat the returns on cash, without throwing themselves at the mercy of the stock market.
Yorkshire’s ‘Cliquet’ range offered capital protection and a guaranteed minimum return, with the potential return of 40% more if the FTSE 100 performed consistently well.
Yet the FCA found that the possibility of achieving even the minimum return was barely 40-50%, while the chances of achieving the heavily promoted maximum return were close to 0%.
Almost 84,000 customers invested more than £800m, and are now in line for compensation.
Arc Of Disaster
Every few years, a batch of structured products fail, and the regulator is left to pick up the pieces.
There were a string of failures five years ago, including Arc Capital & Income, NDFA, DRL and the highest profile of all, Keydata. Its capital guaranteed plans were sold by a number of reputable building societies, including Cheshire, Derbyshire, Dunfermline and Leeds, as well as the Royal Bank of Scotland.
In every case, investors faced an anxious wait to see if they would get their money back.
Keydata had £2.8 billion under management, and more than 85,000 investors. Structured funds are big business.
Confused? You Will Be
Whenever I complain about structured products, the IFAs who so enthusiastically sell them complain that I’m being unfair, and the vast majority quietly do their job without attracting nasty headlines.
But they are still insanely complicated, and too many people who buy them don’t understand how they work.
Take the Yorkshire product. I still can’t get my head around the FCA’s description of what needed to happen for investors to get the maximum payout.
See if you can do better: “If the sum of the returns over the FTSE index (with the return in each period capped and floored) exceed the minimum return, the deposit pays the sum of the FTSE returns. For the maximum return to be achieved the FTSE 100 was required to rise by AT LEAST the cap level in every 6 month period.”
Got that?
Know Your Risks
Overly-complex structured products are built for disaster, and disaster duly strikes them again and again.
If you invest directly in company shares, you know you are taking a risk. Too many investors in structured products have absolutely no idea what they’re letting themselves in for.