Structured products meltdown continues
Investment firms NDF Administration (NDFA) and Defined Returns Limited have fallen into administration following the review. Both firms offered a variety of structured products, including some backed by Lehman Brothers, and chose to file for administration last week rather than face potential payouts to customers.
The FSA has been extensively reviewing structured products, and the firms offering them, since concerns were raised over a lack of transparency and the confusing nature of market literature.
Many consumers who lost out after the collapse of Lehman Brothers may now be hopeful of recompense under the Financial Services Compensation Scheme - something they could not pursue while NDFA and Defined Returns Limited were still afloat.
The firms' joint administrators, Andrew Hosking and Martin Ellis of Grant Thornton UK, will shortly contact all customers with details of what they need to do next.
But Melvin warns investors may not recoup all of their losses: "The cynic in me suspects investors will lose out and Grant Thornton UK will make good fees from the administration."
Another structured product provider, Keydata, flopped in June. The trend raises questions among investors about whether these products should continue to have a place in their portfolios.
Carl Melvin, an independent financial adviser at Affluent Financial Planning, says investors are right to voice concerns. "What will happen to the money invested - and will investors recover any money once the true state of affairs is known?," he asks.
"Structured products place in a portfolio should be very selective and only form a small part of a diversified portfolio. The more complex the structure, the less you should believe the marketing hype."
However, not all structured products should be tarnished with the same brush, argues Andrew Wilkins, executive director of Catalyst Investment Group, which provides asset-backed bonds and structured products.
"The reality is the quality of structured products available to retail investors has already improved considerably and will be strengthened further by likely consolidation within the industry," he says. "Lessons have been learnt to the benefit of all."
Indeed, consolidation does not seem far away. Jubilee Financial Products has registered interest with Grant Thornton for parts of NDFA's structured product business. And it would seem they are hungry for growth since they also sniffed around Keydata in June, that is, until the Serious Fraud Office was called in.
Ian Millward, senior partner at Jubilee, says: "We want to have an international arm and become a global manager."
He accepts that structured products have a "hideous reputation" as too many have "gone wrong", and says the industry needs to become more transparent.
Structured products offer returns based on the performance of underlying investments. Many products are linked to a stockmarket index such as the FTSE 100 or a “basket” of shares. There are generally two types of product, one offers income, the other growth and investors have to commit their capital for the prescribed term, usually three or five years. The investment is not guaranteed and if the index or basket of shares does not perform as expected over the term the investor might not get back all their capital.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.