The European structured products industry has reacted to the latest attempt by a financial adviser to damage the reputation of structured products following a statement by UK-based AES International in which it stated that, “mass sale of structured products by unqualified salespeople [is] a disaster in the making”.
In some parts of Europe, such as the UK, the sale of structured products is relatively closely monitored by regulators, according to AES International. However, in other areas of Europe and beyond, many of the people selling these products are completely unqualified and ill-equipped to explain the full risks of the products investors are purchasing. This includes many of those working in banks and those who claim to be able to offer financial advice.
Structured products help manage specific risks at an institutional level, but are complex instruments and rarely suitable for retail investors, said David Norton, head of investments at AES International. Many people are completely unaware of how complex the products they own are and therefore the risks inherent in them, said Norton in a statement. It isn’t always that the investor will lose money, it is rather that the returns are nowhere near what they expected, he said.
The European Structured Products Association (Eusipa) dismissed AES International’s views as “biased” and with “no solid foundation”. “This kind of statement is not credible, because it’s based on the general assumption that salesforces at a European level are all unqualified,” said Thomas Wulf (pictured), secretary general of Eusipa. “From a European perspective, every market is very different from each other in terms of investor preferences, commonly used payoffs, and the regulatory framework. However, we have seen over the last few years how many European countries have put sales processes of structured products under the spotlight with regulators tightening the rules.”
To say that salesforces outside the UK are ‘ill-equipped’ and unqualified to explain the risks of structured products, and incapable of differentiating between leverage products and investment products “shows a worrying level of mis-information, unless this firm is just pushing an agenda,” said Wulf.
“As we all know, leverage products in Europe are targeted at a completely different audience than buy-and-hold structured products,” said Wulf. “Not acknowledging that a significant number of self-directed investors don’t even go through a salesforce also displays a lack of knowledge.”
Structured products are often sold to investors based entirely on the ‘best case scenario’ with salespeople unaware this is not a guaranteed return, said Norton. Terms such as ‘protection barriers’ and ‘capital guarantees’ give a false impression of what is offered and when this is badly explained the consequences can be disastrous, he said.
There were a few “notable problems” which have stifled appropriate growth on the ‘clean’ end of the sector, said Ian Lowes, managing director at Lowes Financial Management. “The issues have, however, been addressed over the years, and the UK is now in a position where we have suitably qualified and increasingly knowledgeable advisers, a structured products association with increasing effectiveness and a good range of clean products with easily explained outcomes,” said Lowes. “While I am aware of some pretty horrendous contracts being pushed by unqualified salespeople in unregulated territories, I am surprised to hear of such practices going on in the European Union.”
AES, however, says the mis-match in the UK between what investors expect and what they receive has led to a number of fines, and outside the UK the sale of the products is "seemingly rampant, with almost all offshore financial salespeople suggesting investors buy them, frequently due to the high commission payments available on them".
Recent research from Germany, Switzerland and Italy, three of the biggest structured products markets in Europe, shows that structured products have delivered above market returns even in distressed markets, according to Wulf. When it comes to pricing, structured products don’t have excessively high fees, he said.
“This sounds like the usual rant from an adviser trying to make noise and confuse people,” said Wulf. “This is the latest attempt to discredit passive investment products, but I don’t think anyone takes this kind of story seriously any more.
“We have been talking about Mifid and Priips for the last two years and it’s frustrating to see this kind of message,” said Wulf. “Regulators have been working on bringing in new rules to avoid mis-selling and industry trade bodies such as the UK SPA and Eusipa have put a lot of resources into providing investor education and equip investors with the financial knowledge they need to make informed decisions.”
AES referred to data from the European Securities & Markets Authority (Esma) supplied by SRP, which shows that 1.3m structured retail products were sold in Europe last year, meaning the total number of products outstanding had risen to 2.26m by the end of 2014, with around €647.4bn in structured products waiting to mature at the end of last year.
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