Structured Product 6%

oldscot71

My IFA has suggested that I transfer my current ISA's at 3% to a structured investment offering 6% tied for 5 years, payment paid annually or quarterly or monthly. Should the FTSE drop by 50% during the course of the 5 years no payment would be made but the capital at end of 5 years is guaranteed.
Has anyone else been involved with such an investment and is it worth the risk that the FTSE will not collapse.

dunstonh

Has anyone else been involved with such an investment

They have been available for about 15 years. Most of the time they are not very good. However, at certain times they can be attractive. After a stockmarket crash is one of those times. Low interest rates are the other when the structured product (or guaranteed equity bond as they are also known as) offers better income rates. You usually have to be picky as some are really awful (mostly the banks and building society versions - although you can say that about most of their regulated financial products). However, there are usually a couple of decent ones worth considering.

and is it worth the risk that the FTSE will not collapse.

If the FTSE collapses then you wont care as there will be more important things to worry about. However, if you mean collapse in the media sense of the word (i.e. its gone down a little), then you would need to be looking at a 50% drop on the current position. Whilst possible its probably unlikely given the position we are in now and that you are looking 5 years from now.

There are 7% payers at the moment which offer good security. Mention Arc to your IFA. Underwritten by Barclays (so full FSCS protection) and they have two income versions paid monthly in excess of 7% p.a. He may have already considered it and may be choosing another for good reason but its possible that if he isnt that active in investments that he isnt aware it.

Reaper

It is worth checking who underwrites the policy you are being recommended. When the stock market first crashed people who had them thought their savings were safe because of the capital guarantee only to discover the guarantee was underwritten not by the bank they took it out with but by Lehmans who of course went bust. The one dunstonh suggests is underwritten by Barclays so you should be safe there.

I have also heard of companies holding the money in offshore accounts which means they may not be covered by the FSCS.

Hopefully your IFA will be able to reassure you on these points as the interest rate is tempting.

payless

dunstonh wrote: »

Mention Arc to your IFA. Underwritten by Barclays (so full FSCS protection) .

are you sure , surely failure by the issuer would not be covered by FSCS

as whilst its say

We are covered by the Financial Services Compensation Scheme. You may be entitled to
compensation from the scheme if we cannot meet our obligations. This would depend on the type of business and the circumstances of the claim. Most types of investment business are covered for 100% of the first £30,000, and 90% of the next £20,000, so the maximum compensation is £48,000. You can get more information about compensation arrangements from the Financial Services Compensation Scheme.
b. If the performance of the investments does not match any illustrated benefits, you will not, for that reason alone, be entitled to any compensation under the Financial Services Compensation Scheme

As "we" means ARC, I believe this limited protection is on the plan failure of Arc - not Barclays - see

Capital protection and the payment of income is subject to continuing
solvency of the major financial institution which issues the underlying
investments of the Plan (the “Issuer”).

[/QUOTE]

You should note that in the event of the
failure of the Issuer to meet its liabilities
you would not for this reason alone be able
to claim compensation from the Financial
Services Compensation Scheme

Of course thats not I think Barclays will fail.. but a few years back who would have thought any bank would

dunstonh

are you sure , surely failure by the issuer would not be covered by FSCS

Yes. This was the whole problem with the Lehmans one's last year. It was the US arm that was providing the counterparty risk and they were not FSA authorised and therefore offered no FSCS protection. If the counterparty is FSA authorised then there is FSCS protection.

Arc have issued some that are not protected under FSCS. the warnings probably are in place to cover those.

At the moment, the Barclays underwritten ones are considered fine for counterparty risk. I have a list of ones that are considered safe to recommend and others to avoid.

payless

dunstonh wrote: »

. If the counterparty is FSA authorised then there is FSCS protection.

.

Thats not what their own brochure implies-
(Think this only applies to the deposit based structured products ( ie like some of the Investec Bank ones)
see http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2009/0212_dw.shtml

A deposit is very different legally under the Regulated Activities Order from an investment.........

Have your network implied otherwise ?

I'm not disagreeing with the implication of Barclays safty , rather than the actual consumer protection in place on these plans .

dunstonh

The problem is that there the FSCS protection on structured products is still being discussed and progressing very slowly. As I have read it, there are parts which would be covered under the FSCS and parts that wouldnt and you could get different protection between the initial deposit date and the strike date.

Although there are very few tried and tested cases, that clearly demonstrate consumer protection associated with structured investments the FSA has issued some guidance to advisers. (copied and pasted):

For an investment claim to be eligible for compensation the investors must have suffered
financial loss resulting from either bad investment advice or poor investment management.
This would include the Plan Manager failing to carry out their regulatory responsibilities in
respect of the management of assets or failing to pay over monies when due. It is
imperative when advising on structured products that the associated risk warnings are
made clear and where relevant, highlighted within the suitability letter.

However, whilst that sounds positive, there are issues of where responsibility would lie beyond the strike date (the initial deposit prior to strike date falls under the FSCS deposits protection). The securities are deposited with a custodian and registered in the name of an independent nominee on behalf of the client as beneficial owner. This standard practice effectively safeguards the assets from those of the Plan Manager in the event that the Plan Manager becomes insolvent during the term of the investment.

Having just checked the current list of GEBs that are considered ok to recommend, it is noticeable that every single one has Barclays as the market counterparty. In my eyes, that looks like playing it safe and avoiding any of the confusion around when and when not FSCS protection doesnt apply.

payless

No issues about pre-strike date ..

Having just checked the current list of GEBs that are considered ok to recommend,

and agree that Barclays is deemed as one of the safer counterparties.. however I assume your statement is just based on your network's research dept's view , which whilst no doubt in dept and balanced is not an "universal accrediation "


yet the extracts from your last post still really talks about protection if the Plan manager going under - I can't see the "counterparty risk " (/ issuer) being protected by FSCS ( regardless to them being UK based and/or FSA registered themselves).

I do hope we don't see a failure of one of these institutions, as I can see the ( advisory) industry being in trouble, if they gave been sold without the risks being fully assesed & expalined.. as in reality I don't see the FSCS claims being made against the counterparty ( which would seem to be liekly to fail in most cases) rather against adviser

notice the non-advisory routes are still selling ... If the industry professionals are saying it unclear what chance does the consumer have.!

Jonbvn

Lots of different Structured Products on Moneyworld.

http://www.moneyworld-ifa.co.uk/Income_Bonds/index.htm

The kick-out plans are the most interesting IMHO, since the returns are generally capital gains rather than income for tax-purposes.

dunstonh

Jonbvn wrote: »

Lots of different Structured Products on Moneyworld.

http://www.moneyworld-ifa.co.uk/Income_Bonds/index.htm

The kick-out plans are the most interesting IMHO, since the returns are generally capital gains rather than income for tax-purposes.

Some of those are on the list of not to use under advice. Of course, execution only internet sites dont have to worry about protecting the consumer as the consumer takes on that responsibility.

sabretoothtigger

More likely in 4 or 5 years time then a ftse at 2500 is that 6% will be as poor as 0.5% is now