 Following on from the previous article, where a number of investors have asked for a simple explanation of Barrier Protection, we though it would be helpful to provide a simple overview. There are two crucial areas of Risk concern when it comes to selecting a Structured Product to meet an investor’s needs. What is Barrier Protection and how important is it when considering investing in a Structured Investment Product (Structured Capital at Risk product)?Firstly – Market downside Risk Protection– arguable this type of protection has never been so important, during the unprecedented Covid-19 crisis. During the last Global crisis – the Global Financial Crisis – most Structured Products used American Barriers, observed throughout the term. Now, more reassuringly, the UK issued Structured Products using European Barriers, observed at maturity only. If you consider the FTSE 100 fell by c48% during the GFC. A 60% at maturity barrier allowed ‘time’ for the recovery to develop, requiring a further 8% improvement in the index at maturity to avoid a breach scenario – which mostly develops in a capital loss on a 1:1 basis if the barrier is breached. An American Barrier created a breach scenario prior to the contract observation point or at maturity. We know that product issuers are working to construct plans with Deep Defensive Barriers – such as Tempo. We are aware that Tempo are due to launch plans with a 30% Barrier – covering a 70% fall in their index at the end of the 10-year maturity period. Secondly – Issuer/Counterparty RiskIt is important to understand that Deposit Plans are protected up to the FSCS limit – currently £85,000 for eligible investors in the event of issuer failure. Using a Deposit Plan with an Issuer such as Investec (limited to £85,000) has considerably greater protection in the event of the issuer failure than the use of a Structured Investment Product (Structured Capital at Risk) with the same issuer. There is a clear difference between Structured Deposit Plans and Structured Investment Plans. Retail Structured ProductsIn the retail Structured Product market all providers are using ‘Investment Grade’ Banks – usually A rated by S&P. These types of banks are G-SIB Banks – Globally Systemically Important Banks. There are some 30 of these banks, such as HSBC, Société Générale and BNP who have more stringent stress testing, capital adequacy measures and wider responsibilities on behalf of the Global Banking sector to avoid contagion risks. This provides a level of reassurance as this scrutiny ensures transparency and many eyes looking for anything to be wary of, in the expectation (and hope) of avoiding another Lehman Bros scenario and consequential Global Financial Crisis. The Structured Product sector has improved substantially, having been through an FCA Thematic Review – improving risk understanding to investors, which we as a business look to further expand with transparency and education. A decade or so on from the Global Financial Crisis, investors have gathered impressive returns and understand the contract terms in which they invested. As an Advisory business that promotes best practice, we have stayed away from failures – such as Reyker, thankfully due to asking searching questions. We very much like the innovation that has developed during this time of crisis with the lowering of Barriers and Tempo’s recently increased terms based upon the Tempo Pledge. Click the link to read the article in Wealth Adviser where our Richard Harry provides commentary: We must state that comments about any product is not to be seen as providing ‘advice’. ‘Advice’ is always specific to an individual/entity’s needs. We recommend that the selection of an investment is procured gathering Independent Financial Advice in relation to the product’s suitability to meet an investor’s needs. We trust this article is of benefit in further explaining the risks to be aware of in relation to Structured Investment Products. Stay healthy. Best Price FS Team |