The implementation of the Packaged Retail and Insurance-based Investment Products (Priips) Key Investor Document (Kid) has provided further evidence that there are some very significant differences in the models each bank deploys when calculating the summary risk indicator (SRI).

In the second part of an interview Graham Devile, MD at Meteor Asset Management, talks about the impact and flaws of regulation in the structured products market, and the continued appeal of these products as a way of securing funding for banks.

"These fundamental differences make comparison between issuers near impossible, indeed on some occasions comparison of the same issuers Kids can become extremely confusing," he said. "By way of example some issuers model their autocalls on the first expected pay-out so a one-year autocall will model all the charges into year one but if it's a two year autocall the same bank will model the charges over two years, and so on. So you can end up with a product that has a year one autocall showing a disproportionate charge versus a product that has its first call at year two, when in reality the charges on both are the same."

These types of issues "defy common sense and thereby explanation", and as a result the value of the document to the end client becomes questionable, said Devile.

The problem regarding the Kid has been voiced from several quarters to regulators in the UK and Europe, and extends to stress testing and forward looking scenarios as there is no standard model and therefore means each bank uses its own figures and models, which explains why the same product can look different if issued by different banks, as reported by SRP.

"Talking to the various banks it has become obvious that the problems aren't just restricted to the numbers as it seems there has been a huge effort expended in trying to find a standard set of words that can be easily translated into a variety of local languages," said Devile.

According to Devile, the aims of recent regulatory changes are solid in their foundation but the practicalities of implementation mean that these are flawed due to the differentials that exist meaning that it is impossible to create a level playable field.

"Furthermore there is a danger that the changes result in a negative outcome both from the point of view of product innovation as well as the appetite of the market for product," Devile said, adding that sensible regulation should be welcomed as it can only help create an operational framework and standards across the industry that should result in being of benefit to all involved.

"Whilst we think 80% of the new regulatory requirements make sense there are without a doubt areas where it just doesn't make sense, and end up creating more problems than they solve. Regulation should look at the fundamentals, not seek to micro-regulate every aspect of a market."

The current glass ceiling for structured products has to a large extent been created by the historical negative noises which has resulted in a number of advisers and investors shying away from them, according to Devile. "As with any investment these are not the panacea, nor are they for all. That said their use and appeal should be far wider than is currently the case and they should be a valid instrument in portfolio construction as they can add value to the vast majority of investors out there," he said. "Indeed, despite the negative press we have a significant number of advisers that tell us that structured products, and autocalls in particular, are one of the few products that their clients actually understand. As an industry we need to continue promoting the value of these products and reacting with facts to the negative press."

There is no doubt that the structured products market faces challenges but they are now a more established offering and have proven their value as shown by the recent result of a 'six-year challenge' that that pitted a portfolio of five structured products against a low-cost tracker selected by the UK Investment Association. At conclusion of the challenge, in December 2017, the tracker had risen by 62.55% net of fees and the Lowes portfolio had risen by 81.11%.

"[Structured products] offer the banks an appealing way of securing funding, and as a result we are seeing more issuers returning to the retail space," said Devile. "This is obviously good for the sector both in the short and long term."

The UK market has seen several investment bank resuming their hedging activity in the retail market after a period of reduced or no activity, according to SRP data. This included the return of Morgan Stanley which has hedged six products in 2018 sold by Investec, Reyker, Meteor and Walker Crips, after two years of absence; Santander has also returned in 2018 acting as bond provider for one product (Investec) after a two-year hiatus. BBVA is also back as a bond provider of 10 products marketed by IDAD since the last time it hedged three products in the UK in 2016; HSBC almost double its hedging activity (37 products) in the UK in 2017 compared to 2016 when it launched 19 products while Natixis almost trebled its hedging activity compared to 2016 (28 products) after providing the bond for 76 structures sold in the UK in 2017.

New distributors in the UK include Augere which launched earlier in 2018 as a new distribution outlet for Credit Suisse; Dura Capital - the retail business of Catley Lakeman; and Tempo Structured Products, a new structured products firm targeting UK professional advisors and wealth managers.

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