Banks increase structured product offers

By Elaine Moore

Banks and building societies are selling a greater number of structured products to savers who want to beat inflation - in spite of indications of a crackdown on complex investments from the new financial regulator.

Since last year, savers seeking higher returns than conventional deposit accounts can offer - in an attempt to protect their cash from rising prices - have been offered products that link returns to an inflation index, by high street names Santander and Yorkshire Building Society.

In total, the number of inflation-linked structured products has doubled, as cash accounts have been unable to pay out returns that beat inflation, in a low-interest rate environment.

Providers say savers have been increasingly willing to give up a 3 per cent return from deposit accounts for the chance to earn 6 per cent in a structured product.

In 2011, total sales of structured products in the UK exceeded £9bn, down from £12bn in 2010, according to the website StructuredRetailProducts.com, which tracks the sector. But the number of new investment products launched on to the market over the year matched the previous year.

And out of the 900-plus new offerings, inflation-linked products were the third-biggest sellers.

When launching new products, many providers have focused both on inflation and concerns over counterparty risk - the danger that the bank providing the return may get into financial difficulty. Awareness of this risk has increased since Lehman Brothers collapsed in 2008, and defaulted on its structured product pay-outs.

As a result, more "collateralised" products have been sold - as these hold cash equal to the daily value of the product in a separate account, in low-risk assets such as government bonds. This safeguards investors' cash against a bank failure - but, as Ian Lowes of Lowes Financial Management notes, does not necessarily lower the potential returns from a product.

Structured products linked to a single large index, such as the FTSE 100 or S&P 500, remained the most popular choice for investors, but fears over equity market volatility have also boosted sales of hybrid investments. Hybrids try to replicate a diversified portfolio by linking returns to a range of asset classes, and sales rose from £139m to £226m in the pas 12 months.

However, last week, the Financial Conduct Authority - the UK's new consumer protection watchdog - indicated that it could ban products it deemed harmful to the public, and suggested that structured products could come under greater scrutiny. Advisers therefore expect regulation will play a far bigger part in the design of future products.

Many advisers remain wary of structured products - even the inflation-linked investments.

"The biggest trend in structured products is that so many of them are being marketed and sold," says Danny Cox, head of advice at Hargreaves Lansdown. "But some of the literature that accompanies the products is so full of jargon you would need to be a rocket scientist to understand. I prefer products with a smaller upside which are easier to access."

Story originally published on ft.com.