Barclays Stops Selling Complex CDs to U.S. Retail Clients

  • Todd Dilatush, who focused on the products, has left bank
  • The CDs often resulted in customers earning zero interest

Barclays Plc has stopped selling highly engineered certificates of deposit that looked attractive to U.S. savers but often resulted in customers earning zero interest, according to people with knowledge of the matter.

As part of that exit, Todd Dilatush, who focused on selling structured notes and market-linked CDs to U.S. retail investors, has left the bank. Dilatush confirmed his departure and declined further comment. Barclays, one of the largest sellers of these products in the U.S., will continue to support its outstanding CDs, a person with knowledge of the matter said. The people asked not to be identified because they were not authorized to speak publicly on the matter. Brittany Berliner, a spokeswoman for London-based Barclays, declined to comment.

The bank is leaving a business that many banks are in, and that regulators have cautioned investors about for years. In 2012, the Financial Industry Regulatory Authority, a securities industry regulator, said it was looking at whether buyers of these types of CDs understand the risks embedded in them. Returns on the instruments are often tied to a group of stocks or other risky assets, and while terms vary, a CD could offer yields of as much as 5 percent annually for a five-year investment, a Barclays summary shows. That’s far more than the average 1.19 percent average for a five-year conventional CD, according to data compiled by Bloomberg. Investors are usually guaranteed to get their principal back.

‘In Crosshairs’

In the case of CDs linked to a basket of stocks, if a single company’s shares end up tanking, investors may end up receiving no interest at all. Barclays sold more than 300 of the certificates between October 2010 and May 2016, according to a list seen by Bloomberg. Almost a quarter of the structured CDs sold between October 2010 and October 2013 had paid zero interest as of June, according to the list.

“Regulators have structured products, including structured CDs, in their crosshairs,” said Andrew Stoltmann, a lawyer representing investors in securities lawsuits and arbitration. “Products that would have gone unnoticed five to 10 years ago are now facing major regulatory pressure for companies peddling them.” Stoltmann had no specific knowledge of Barclays’ motivations, and Finra has not taken any action on the CDs.

Banks may also stop selling structured CDs because other sources of funding are cheaper, or because other forms of borrowing are better suited for their assets, said Kenneth Thomas, a Miami-based consultant for retail banks. And if the products are put together properly, investors can get higher returns than they would on a regular CD, without risking their principal, said Andrew Gonski, a financial planner and owner of Austin, Texas-based TrestleBridge Capital.

‘Chopping Wood’

“The devil is in the details,” Gonski said. “If you’re not going in and chopping the wood to figure out if the correlation between the basket of stocks is something of value, you could end up in a zero-coupon situation.”

That’s why some advisers stay away from them altogether. “The equity-basket CDs were structurally flawed,” according to Chris Sandys, a wealth manager at Belpointe Asset Management in Greenwich, Connecticut, who counseled his clients to avoid the CDs. In recent months, he added, Barclays did offer some CDs that were linked to more stable stocks through a proprietary index built by the bank, and seemed to offer better possible returns. Structured CDs do not have to be registered with the Securities and Exchange Commission, so there is no official sales data for the instruments.

One of the CDs Barclays sold in June 2011, a six-year instrument, is based on a basket of 10 stocks including AT&T Inc., Pfizer Inc., and what is now known as Alphabet Inc., the parent of Google. In calculating an investor’s yield for the CD, the bank gave much more credit for a stock’s decline than for its gains, meaning a single stock that performs poorly can wipe out gains notched by other stocks. Two of the basket components in this CD, Apollo Education Group Inc. and Weight Watchers International Inc., had tanked, which pushed the coupon to zero.

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