Regulators Don’t Understand Structured Products, Eusipa SaysAlastair Marsh
Regulators of the $1 trillion structured products market don’t understand the difference between risk and complexity, according to the European Structured Investment Products Association.
Individual investors who buy the notes, which package debt with derivatives, don’t need to understand every detail of the structures, said Thomas Wulf, secretary general of Eusipa, as the organization is known. The association is comprised of issuer groups in Europe that represent banks including Deutsche Bank AG and Goldman Sachs Group Inc.
Wulf was responding to criticism of structured notes from European and U.K. regulators who are scrutinizing the market. Martin Wheatley, chief executive of the U.K.’s Financial Conduct Authority, said this month the products have “often been mind-bogglingly complicated financial gambles.”
“Complexity is not always a disadvantage to a client,” said Wulf. “Adding features to a product to make it more secure, such as by giving it protection against capital loss or issuer default, is necessarily making it more complex.”
The Madrid-based International Organization of Securities Commissions proposed new rules on April 18 governing sales of the securities. The organization, which represents more than 100 national regulators, said it was responding to concerns of its members that structured notes are difficult for investors to understand, leaving them vulnerable to mis-selling.
At least 16 regulators are considering changing their existing rules for the products, said the Madrid-based group.
Policy makers are preparing to require lenders in the European Union to publish so-called key information documents, or KIDs, that provide concise information about the characteristics and risks of their products, which could be in place by the end of next year.
French socialist Pervenche Beres is leading a committee responsible for the European Parliament’s position on the so-called Packaged Retail Investment Products rules.
Beres is focusing on consumer protection rather than the level of risk of individual product types, said a spokesman for the politician, who asked not to be named citing policy. She wants to extend KIDs to other securities besides structured products, including stocks and bonds, to create a level playing field, he said.
The securities should be considered in relation to who is buying them rather than in abstract terms, said Jamie Smith, chairman of the U.K. Structured Products Association. Citigroup Inc., Morgan Stanley and Royal Bank of Scotland Group Plc belong to the association.
“Complexity is a relative term that depends on the investors at the end of the chain,” said Smith. “It can’t be defined adequately by reference to the number of derivatives or calculations involved.”
Banks in Belgium signed a voluntary moratorium on sales of certain complex structured products in 2011 at the request of the country’s Financial Services and Markets Authority.
Regulators should pay more attention to how the securities are distributed rather than how many moving parts they have, said Chris Muyldermans, head of policy advice, public policy and regulatory affairs at the asset management arm of KBC Groep NV in Brussels. The Brussels-based bank raised $318.2 million from selling 18 structured notes last year, according to data compiled by Bloomberg.
“Do investors really have to understand every detail of the derivatives that create the structure and determine its outcomes?” she said. “What they need is distributors or salespeople to explain the life cycle of the products and what can happen in between, not every detail of its underlying structure.”
Distributors typically include retail banks, wealth management companies, financial advisers and brokers.