Regulation is not to blame for the market contraction in the Nordics and technology is the answer to overcoming the hurdles the industry is facing, according to panellists at the Leader's Forum at SRP's third Nordic Structured Products & Derivatives Conference 2017, held in the Grand Hotel in Stockholm on September 27, 2017.

The Nordic market is currently stalling and especially the biggest markets Sweden and Finland are contracting this year with distributors disappearing or showing less activity, however there are several reasons behind the decline and regulation is only one of them, according to the panel. Low interest rates, bad press, cease of loan financing and whether the banks prioritise pushing the products are all important factors explaining the contraction, the panel agreed.

According to Heikki Ruoppa, global head of investment solutions at Danske Bank Markets the low interest rates environment has made "impossible" to do capital guaranteed products anymore which was a "decent part" of Danske's volumes. "Lately we've all had to focus on the regulation and for some banks it's taken more time [to adjust]," said Ruoppa. "We've seen some major players like SEB giving up their retail distribution and only do private banking, and Handelsbanken which used to be quite active is less active these days."

The market decline is due to "a number of factors and it depends how far back you look", according to Morgan Stanley's executive director and head of Nordics, Aymeric Badoy (pictured). "[A number] of banks in the past sold structured products with loan financing attached and for different reasons this has ceased in the different Nordic markets which has driven the volumes [down]," said Badoy.

"We've also seen an increase in ETPs and I think to some extent a portion could have migrated to ETPs from structured products investors. Also of importance is the fact that it has tended to be a push product and not a pull product so being based in London and a bit removed from the client base, I wonder, how much is not being pushed as a product anymore?"

According to Johan Ahlberg, co-head of structured investment solutions at Nordea Markets, the issue of structured products being pushed has been addressed by regulation. "With the regulation coming into effect in January in relation to going from push to pull there will be a natural adjustment and there has to be a shift," said Ahlberg.

"Getting manufacturers closer to investors will be crucial to make this transition from push to pull," said Ahlberg, adding that the Nordic market has always practised 'self-regulation' and as such it should be less vulnerable to new regulation. "The Nordics have a quite conservative stance and have been quite good at self-regulation so in a way it's a little bit surprising that regulation comes in and hit an already conservative market."

Regardless of the reasons for the decline there is consensus that the market will be flat for at least three to six months but once the regulation is in place there will be a 'level playing field' for all market participants. "There is obviously a bit of a headwind and the market will drag but in the long term, customers will come back," said Badoy.

"When you look at the performances of the products as an asset class [they] have delivered for many years so there is a value proposition which will be implemented differently in the different markets but there is room to grow."

Ruoppa pointed that once the Mifid 2 regulation is implemented providers "will be back and start selling more actively as there is definitely a demand for structured products". "I'm modestly positive," said Ruoppa. "Regulation will determine which products will work or not and which are easier to explain so some structures are more suitable."

Ahlberg agreed and stressed that as an industry there is a need to standardise structures so it is easier to explain and match them with the clients' needs. "It will take a bit of time but there is a lot of opportunities coming here," said Ahlberg.

The Nordics is globally one of the best markets in terms of performance but the public image in the media is not good which suggests the media also needs to be educated.  "One massive issue is that people confuse complexity with risk," said Badoy, adding that scenario analysis tools can help illustrate the outcomes and show how robust structured products can be in investors' portfolios. "An average problem is that people in the industry are a bit nerdish and excited about payout formulas and mathematical details. Customers are not interested in this and if you can't explain the secondary market price after one year when the market is up 20% but the secondary price is still 99% it doesn't give a good impression to the end investor which ends up feeling it is a shitty product."

"We need to focus more on marketing and explaining what we're selling," Ruoppa said.

The panel concluded that the industry can learn from other markets such as Belgium where the regulator stipulated that products should be able to be explained in no more than 2-3 sentences. This would also overcome the gap between the 'nerdy' providers and the end investors which is an area where new technology could help. "New digitalisation tools will help to standardise the market," said Badoy. "There's been a loss in translation but if you develop tools to clearly show the outcome and how the product will perform in different market scenarios, this will help."

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