Structured products What structured products are

Structured products aren't always as safe as they seem

Structured products are a type of lump sum investment product offering returns based on the performance of underlying investments. They are fixed term products (usually three to six years) and the returns they provide are usually linked to the performance of a stock market index such as the FTSE 100. Banks, structured product providers and financial advisers all sell these products.   

They appear to offer a possibility of higher returns than normal savings, while still protecting your capital. 

This sounds attractive and it’s perhaps no wonder that sales of these products are rising both in the UK and around the world.

However, Which? believes this is a type of product that can be confusing, complex and costly, and isn't always as safe as it seems.  

The underlying investments can be underwritten by unidentified firms based in foreign countries, and the guarantees of capital protection, provided by these companies, known as counter-parties, are only as good as the companies themselves. When the US investment bank Lehman Brothers collapsed in September 2008, around 6,000 people who had structured products sold by companies such as Arc, Legal & General, Meteor and NDFA were left with nothing. Their structured products were backed by Lehman Brothers and when it became insolvent, the capital guarantees it offered fell apart. Investors have been unable to claim compensation from the Financial Services Compensation Scheme (FSCS) and are now in the queue with all of Lehman's other creditors.  

More recently, some investors who bought products from structured product provider Keydata have been told that the whereabouts of their money, which was invested by a counter-party, SLS Capital, is unknown. It's still unclear whether they will be able to make a claim for compensation from the FSCS. 

What types of structured product are there?

There is a huge range of structured products. Here we explain two plans that were being sold when we carried out our research. However, there are other, more complicated plans.

Growth plans

The Barclays’ defined returns plan is a typical growth plan. Whatever happens to the stock market, you get your original capital back at the end of the five-year investment, provided the counter-party underwriting the guarantees doesn't default. And if the level of the FTSE 100 is not lower at the end of the plan than at the start, you get a return of 32%.

Annual income plans

Other plans promise an annual income. The NDFA regular fixed-income plan, pays 6% a year over five years. But as is typical with income plans, if on the last day of the investment term the FTSE 100 is 50% or more below its level at the start of the plan, you lose some capital – 1% for each 1% that the final index level is below the starting index level.

How structured products work

Below is a typical example of how structured products work, though there are other models.

• You invest a lump sum over a fixed term. Your money is taken by the plan provider and split into two parts.
• Most of the money goes to buy a corporate bond from a counterparty – usually an investment bank. The bond promises to pay back an amount large enough to repay all or part of your initial investment at maturity (when the fixed term ends).
• The rest is invested, again through a counterparty, in derivatives to produce either income or growth as promised by the plan.
• If you choose an income plan, you will receive money every month or year.
• When the plan matures (ie the fixed term ends) a capital-protected plan aims to at least return your investment. With other products you may lose some or all of your capital if the index your plan was linked to falls below a pre-set limit. If you have a growth plan you’ll receive some growth providing the index rises.
• But if the counterparty providing the capital protection goes bust at any time you could lose all your money. Equally, the returns you receive are dependent on the counterparty and will be at risk if the counterparty fails. You may not be able to claim through the Financial Services Compensation Scheme.

If you are looking for investment advice, have a look at our guide to risk-free investing and understanding investment risk.