Legal & General has responded to accusations from financial advisers that a number of product providers have been ramping up rates since the Retail Distribution Review (RDR) came into effect.
James Harrington, head of investment implementation for L&G, defended his firm following an article in The Financial Adviser magazine in which Simon Webster, managing director of Facts and Figures Financial Planning, accused L&G of failing to provide a better deal for clients in the post-RDR, commission-free world.
"The structured products industry has not covered itself in glory in past years, and therefore its understandable that if advisers have not looked at the detail they may consider something underhand has occurred," he said. "The reasons for the products seemingly not improving between tranches pre and post RDR are quite easy to look and have nothing to do with RDR. If these products were launching now with commission, then the terms would look markedly worse, it is simply where pricing has gone".
If you look at the two L&G products, he said, it is reasonable to ask why the one sold in November looks the same as the one issued in January, when the commission has been removed. "It's a fair question because it just looks too coincidental, but the fact is that it is actually a coincidence," he said.
Harrington explained that funding levels, and specifically the demand for funding from banks, has 'fallen off a cliff'.
"Pricing, compared to where it was, is even more challenging. The funding for lending scheme has had a much bigger impact than was imagined. this can also be seen in the paucity of savings rates now being offered by banks and building societies"
"Bank risk, reflected by their CDS levels, has dropped significantly over 18 months, but even more so in the last two months of 2012," he said.
The CDS level of the counterparty of these two products (Santander) has dropped off by more than 20% and the volatility has gone down as well. "If you were paying 220bps over Libor, it dropped to 185bps, so if you follow the movement of the CDS then you can see the difference in pricing in the two contracts."
Harrington said that some advisers believe that without commission, "if they advise investors into an autocall contract and apply a fee of 3% then the autocall drops from, for example, 8.4% to 5.4%."
"This is strictly not true, as the contract itself is not a one year contract but rather has potential points of early maturity up until it's final maturity date, so it could just reduce the total payout by 0.5% a year, rather than the headline grabbing 3%."
Ian Lowes, managing director of Lowes Financial Management, said it was a question of timing. "If you had launched these products a month ago with the charges built-in, they would have looked even worse," he said. "It seems these rates will remain at these levels for a while and this environment may force some providers to reduce their offerings because it will be difficult to offer competitive rates."
However, he stressed that the review has played no part in this. "Since the RDR came into effect, the market has seen a reduction across the board on funding rates, but that is not connected to the RDR itself," he said. "Structured deposits with no equity risk have also seen rates falling. This is part of the cycle and will only change if bank's funding rates and volatility increases."