Thoughts on the FSA structured product paper

Jamie Smith, chairman of the UK Structured Products Association, responds to the Financial Services Authority (FSA) consultation paper on retail product development.

Jamie Smith
Jamie Smith

As the UK’s regulator, the FSA wants to ensure that the interests of investors are considered in the design and marketing of structured products.

As a trade association, we agree completely with this – guidance and views from the FSA will benefit investors and providers. Structured products exist to provide clearly defined solutions to investors’ needs, and this has resulted in their growing popularity with investors and advisers.

The structured products market in the UK provides consumers with a choice of products, from simple deposits with variable returns to more sophisticated investments that compliment diversified portfolios.

The aim of these products is to give the investor a clear view of what their investment is exposed to, what the likely level of risk is, and what the potential returns could be, allowing a straightforward assessment of whether a given product is suitable to the investor’s needs.

The UK Structured Products Association works with the European Structured Investment Products Association (Eusipa), Tisa and the Joint Association Committee, to support greater awareness and understanding of these products and to encourage best practice.

Most structured products for ordinary investors are relatively simple compared to other investments however sometimes additional features are introduced into a product to provide a specific need for investors (for example to add an element of capital protection or mitigate the counterparty risk) but it is important to distinguish between complexity and risk. Because something is complex it does not mean that it is more risky – if this were the case, many traditional investments would already be “out of bounds”.

It is often the case that additional product features (which are seen as adding complexity) actually reduce risk and increase protection. Investors know that diversification of their portfolio can be a good way to manage risk, compared with a single investment – in the same way some structured products have more moving parts in order to balance risk and reward optimally.

We genuinely believe that structured products, as one of the many tools available to IFAs and wealth managers, can add real value to investment portfolios.

Jamie Smith is chairman of the UK Structured Products Association.