Another provider of structured products bites the dust.
What exactly is the problem with structured products? They seem to bring investors nothing but trouble. And in recent weeks, they have been delivering it by the truckload.
I wrote back in April that safe investments are dangerous, and this month has produced further evidence to support my claim.
On Monday, Arc Capital & Income became the latest firm offering structured products to go into administration, following a lengthy FSA review. Some 10,000 investors now face an anxious wait to see if they will get their capital back, while their income payments have ceased.
It spells yet more misery and worry for people who bought structured products, most of whom were low-risk investors looking for capital guarantees, and a slightly better return than they could get on cash.
What's to like?
I have to declare an interest here. I don't like structured products. I don't like them because they are marketed as ideal for low-risk investors, but are in practice deadly dangerous.
I don't like them because they are overly complex, often backed by a bewildering array of derivatives, and have to rely on stock markets behaving in a particular way, by a particular date, for investors to get any return at all.
I don't like them because their charging structure is murky, with too many middlemen swimming below the surface, nibbling at your money.
I don't like them because six or seven years ago I reported extensively on precipice bonds, an earlier form of structured product that funded their guaranteed high income by eating into investors' capital. That ended in a massive mis-selling scandal, with anxious investors fearing for their life savings, most of them elderly and very, very worried.
I really, really don't like structured products.
Down they go, like dominoes
There are plenty of reasons to dislike structured products, but now here is one I never considered, and perhaps it's the nastiest of all.
The companies that offer them keep collapsing. Only a few months ago, I was writing about collapse of Keydata Investment Services, which specialised in selling structured, stock market-linked products, until it went into administration in early June.
Many investors were shocked to discover their money was at risk, for the good reason that they had never heard of Keydata. Its name didn't appear on the policy literature they had been handed.
So they were gambling their life savings on the fortunes of a company they knew nothing about. That's not what I would call low risk or guaranteed.
Life is a Lehmans and I want my money back
Earlier this month, NDFA and Defined Returns Ltd (DRL), who sold structured products to 35,000 UK investors, both went into administration.
To lose one structured product provider may be regarded as a misfortune, to lose two looks like carelessness. But three? Four?
There is a common thread linking Arc Capital & Income, NDFA and DRL, and you won't be surprised to discover it is Lehman Brothers.
It was Lehmans that funded the guarantees underpinning these structured products, and I guess that looked like pretty solid backing at the time. Nobody could have predicted the mighty US investment bank's sudden annihilation.
That's the case for the defence.
Rich without risk? It's not possible
But this is more than simply bad luck. I think structured products are inherently dodgy, because they are trying to do two things at once.
They pretend to offer investors the glories of the stock market, without any of the agonies. The Motley Fool is bold in arguing its belief that markets can make you wealthy in the longer run, but we also make it clear that you can suffer a lot of pain along the way. That's the trade-off.
Structured products don't do that. They promise to make you rich without risking your capital. Unfortunately, people claiming to offer the best of both worlds often end up delivering the worst of both.
Yuck!
Structured products are a cynical marketing exercise, targeted at the old, vulnerable and nervous.
And once they've been sold, the backroom boys have to come up with all sorts of tricks to make the sums stack up. The result is that structured products have too many moving parts, boosting the likelihood that something will go wrong.
So what you have are highly sophisticated products sold to unsophisticated investors, by advisers who should know better.
What happens next?
The pressing question now is whether investors will get their money back. The answer depends on the company.
Arc Capital's administrators Carter Backer Winter LLP will shortly contact all customers to tell them what they need to do next. Customers may be entitled to compensation from the Financial Services Compensation Scheme (FSCS), but face an anxious wait before finding out. You can find more information from the FSA here or call the dedicated helpline on 0844 770 2203.
NDFA and DRL -- Administrator Grant Thornton has taken over the running of these two companies and again, their 3,500 investors may be entitled to FSCS compensation, a process that can take up to six months. Until the investigations are complete, customers can't redeem their money, and all income payments will be stopped. You can find more information here on the FSA website or call its dedicated helpline on 0844 880 6511.
Keydata -- Administrator PricewaterhouseCoopers has discovered serious irregularities with one fund, SLS Capital SA, an offshore fund with whom Keydata denied any direct connection, except as a distributor. More than £100m is missing and the Serious Fraud Office has been called in. Around 5,500 savers with money in three Keydata products will have to apply to the FSCS to get their money back, but 85,000 investors in 160 plans should be safe.
FSA gets tough
The FSA has just announced tough and wide-ranging action to help investors who have received unsuitable advice or misleading promotional material when buying a Lehman-backed structured product, and measures to address problems in the wider structured products market.
It will also be writing to the largest sellers of other structured products, asking them to review past sales and provide investor redress where appropriate, and change their approach for future advice and sales.
Next year, the FSA will carry a follow-up assessment, to ensure firms are meeting its standards. More details here.
Filthy!
That's good news. But I still maintain that structured products are so hideously complex and murky, that they are ripe for abuse. Worse than that, they are being targeted at the most vulnerable form of investor of all. Personally, I wouldn't touch them with a bargepole.
NDFA was regulated by the FSA, but the product was underpinned by Lehman Brothers. As Lehmans was based in the US, investors weren't covered by the FSCS, and are now standing in line for compensation with other Lehmans creditors.
In March, I reported on the collapse of another structured product, the NDFA Capital Secure Fixed Rate Plan, which offered up to 45% over five years with capital guarantees that proved ultimately worthless.
Administrator Grant Thornton says that it hopes to sell NDFA and DRL, but it still needs to verify that investor funds were kept in a segregated account. Until it does, investors can't get their money back, and they won't receive any income from the plans either.
At least it looks like Keydata customers will all be getting their money back, because it was held in secure custody accounts. It may take a lot longer to get back their confidence in financial services (not that I'm suggesting they should).
Administrator PricewaterhouseCoopers took the preliminary view that the funds were held in secure custody accounts, protecting investors. Then it discovered serious irregularities with one fund, SLS Capital SA, an offshore fund with whom Keydata denied any direct connection, except as a distributor.
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