Investors still find products appealing

Europe, home to the most developed market for structured retail products, is expected to stage a modest recovery in 2010, but sales will still not match the 2007 peak. The underlying securities markets remain volatile while regulators are taking a closer interest in industry practices.

Gross sales are expected to rise by about 8 per cent this year from the 2009 figure of $228bn (£150bn, €173bn) compared with increases of 14 per cent in the Americas and 9 per cent in the Asia-Pacific region, according to data compiled by Structured RetailProducts.com. Last year European sales fell 21 per cent.

The Europe-wide trend concealed very different developments in different national markets. In the two largest markets, Germany and Italy, sales fell 17 per cent and 20 per cent respectively, to $59bn and $49bn. Spain was the biggest loser with sales down 44 per cent to $23bn while the UK was the most buoyant, recording an increase of 50 per cent to $21bn, according to the website.

“There were substantial differences across the different market segments,” says Jean-Eric Pacini, head of equity derivatives sales at BNP Paribas, London. “Products that declined most in volume were those that did not offer capital guarantees or were short volatility; those in markets that faced regulatory changes such as the Italian index-linked life insurance business; and those from issuers that had credit spread issues at the time of the crisis.”

Investors were unsettled by the Lehman Brothers default and the realisation that they had been unwittingly exposed to unknown counterparties in the transactions they had entered into. The quality of advice to retail investors also left much to be desired.

In the UK, a review by the Financial Services Authority of advice given to investors in structured investment products found that in 46 per cent of cases in its sample the advice given was unsuitable. In a further 23 per cent of cases it was unclear whether the advice had been suitable, often because customer records were inadequate.

Yet the appeal of structured products to investors remains strong. “When interest rates are very low investors are looking for alternatives,” says Robert Benson, managing director of Arete Consulting. “Structured products are seen as a way of getting a potentially better return while still protecting your capital. Investors are cautious and are attracted to the capital-protected element of the products.”

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