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Structured products

Structured products can be any one of a wide range of investments and can offer income, capital growth, or a combination of both. Most structured products tend to be open to new investment for a short period of time. Your money will then usually need to be tied up for between one and ten years. Some structured products offer full capital protection, but others offer partial or no capital protection.

Structured products are often complicated. You should seek professional financial advice if you are in any doubt about the potential risks and returns involved.

You could lose some or all of the money you put in to these products, so make sure you understand the risks before investing.

How they work

Structured products offer returns based on the performance of underlying investments. Many products are linked to a stock market index such as the FTSE 100. The underlying investments may involve different firms based in various countries.

A typical structured product will have two underlying investment components – a note and a derivative.

A note is a type of debt security. This component is used to provide capital protection. It may pay interest at a specified rate and interval, and may repay some or all of your original money at maturity.

A derivative is a financial instrument linked to the value of something else, such as a stock market index or the price of another asset, such as oil or gold. This component is used to provide the potential growth element that you could get at maturity.

Investors are usually offered only a share of any increase in the level of the index or asset price which occurs during the term of the investment.

How your capital is protected

Even if a product offers ‘capital protection’ it can sometimes fail, causing you to lose some or all of your original money. For this reason, if you decide to invest in structured products then they should form only a small part of a balanced investment portfolio. You should also consider spreading your investment between several products which rely on different financial institutions to protect your money. You should always know which financial institution is ultimately responsible for offering any ‘capital protection’, and if it is not clear then you should seek professional advice. For more information see Diversification.

Structured products offer two broad types of capital protection.

  • Full – described as ‘100% capital protection’, ‘capital security’ or a ‘capital guarantee’. This aims to return all the original money invested at the end of its term, regardless of any fall in index level or asset price. Remember, though, that the cost of offering this protection will affect the returns you get, and there is still a chance you could lose some or all of your original money.

  • Partial – often offered by ‘structured capital-at-risk products’ (known as ‘SCARPs’). This aims to return the original money invested at the end of the term unless the index or asset price to which the product is linked has fallen below a predetermined threshold. If this happens then you can lose money, and with some products, quickly lose a lot or even all of your money.

Key risks and product features

You could lose some or all of the money you put in to these products, so make sure you understand the risks before investing.

The following list is not exhaustive and not all risks or features are applicable to each type of product.

  • Credit risk
    A product may be designed and marketed by a ‘plan manager’, but the returns and guarantees are generally provided by a third party. If that third party goes bankrupt, you could lose some or all of your money, even if a product is called ‘protected’ or ‘guaranteed’. You may not be covered by the FSCS if this happens. Some products try to mitigate this risk by holding collateral (additional money in other assets) in case the third party fails. If this is the case, you should check that you understand how this collateral is treated and how safe it is.

  • Market or investment risk
    If the return of your original money depends on the performance of a stock market index or asset, then if the level of that index or asset falls during the term of the investment you may lose some or all of your original money. If this happens, you could lose your original money very quickly.

  • Liquidity risk
    The benefits offered (such as capital protection) are usually only available if the product is held for the full term. It may be difficult or expensive to access your money before the end of the investment term.

  • No dividend income
    Even if a product is linked to the performance of a stock market index, you will not receive any dividend income from the companies which make up that index. This can mean that returns are lower than on other stock-market-linked investments.

  • Capped returns
    Many products restrict or cap the level of the return you can receive, so if an index or asset price rises above the level of that cap, you do not receive additional returns.

  • Averaging
    The return offered by some products can depend on several measurements of index levels or asset prices during the life of the investment. While this can protect you from short-term falls in an index level or asset value, it may also prevent full exposure to any gains.

  • Limited participation
    Many products only offer a proportion (for example 50%) of any gains made by the index or asset to which they are linked.

  • Inflation
    Even where a product is marketed as ‘100% capital protected’, the real value of the capital can suffer significant erosion by inflation over the term of the investment.

  • Tax
    The tax treatment of structured products depends on their legal structure and on any tax wrapper in which the product is held.

Structured products are often complicated. You should seek professional financial advice if you are in any doubt about the potential risks and returns involved.

Structured deposits

Some structured products are deposits rather than investments. Structured deposits (often marketed as ‘guaranteed equity bonds’) can only be offered by firms such as high-street banks which are able to accept deposits.

Your money is treated as if it is in a restricted-access bank account but, unlike a traditional savings account which pays a fixed rate of interest, the interest you receive will depend on the performance of a stock market index or asset.

It is important to note that you may not be covered by the Financial Services Compensation Scheme (FSCS) if the firm holding your deposit goes bankrupt.