UK structured product issuance in 2022

The UK Structured product market has shown strong growth in the last two years as world economies and stock markets have recovered from the effects of the pandemic. The UK has a well established framework serving the retail market made up of issuing banks, plan managers (the UK regulatory term for distributors) and financial advisers. Other sectors of the UK market that sell or use structured products include private banks, discretionary fund managers and funds of structured products.

There have been various changes over the last ten years that have affected the health of the overall market, issuance and distribution patterns. We shall consider these and look at the appetite of investment banks for this business.

Back in 2012 the “Retail Distribution Review” (RDR) was brought in by the UK regulator, now the FCA. This wide-ranging directive banned commissions and introduced various other rules and practices in an attempt to provide a market that was more efficient, better value and that functioned fairly for investors. RDR prescribes that independent financial advisers must cover the whole of market for their investors and assess all asset classes and manufacturers and opportunities.

Many observers thought that would be good for structured products by bringing them to a larger client base but initially it had a rather negative impact on the sector as some adviser firms streamlined to what they perceived to be lower effort channels.

In 2015 the FCA thematic review on structured products proved to be a further obstacle. This introduced detailed product testing obligations and made all those in the distribution chain from issuers downwards accountable for larger parts of the entire process from product creation to investor adoption. It was no longer defensible for a company to focus on its direct part of the distribution chain.

This regulation had some direct consequences in the market with investment banks reacting to their new responsibilities and finding it harder to service a fragmented adviser client base once onerous “know your customer” obligations came in force making small deal sizes uneconomic.

Prior to the FCA thematic review, several banks had run a straight through operation where they acted as both issuer and distributor. This model quickly fell out of favour leaving only Investec conducting business in this way for subsequent years. The most pronounced response came from Morgan Stanley which had been active in the UK as issuer and distributor prior to 2015. They shut down their programme immediately and only returned as an issuer many years later and would appear to have no plans to get directly involved in distribution again.

In the years that have followed the UK market became steadily more active. Interestingly, when PRIIPs and MiFID II were introduced in 2018 the impact in the UK was much less than in Europe because of the preparatory work and improved governance from the FCA’s previous directives which had acted as forerunners of the European equivalents.

A different type of disruption occurred in 2020 with the market and business impact of the COVID pandemic. March 2020 saw severe market falls, a sudden shift to remote working and both of which caused product issuance to be drastically hit for many months as investment banks needed to manage the risk caused by market falls, volatility spikes and dividend forecasts slashed as companies held on to cash to boost balance sheets.

There has been growth in the market since that point, with 2022 projected to have the largest number of structured products issued in the UK market. This would take it past the previous record year of 2018. This year’s fortunes can be ascribed to recovering markets, product maturities and greater take up by advisers who see value in the terms offered and enough potential return generated by continued volatility in the market.

Figure 1 – UK Issuance last five years and last 12 months

Figure 1 shows the top ten banks of UK Structured product issuance for the last five years and last 12 months up to 1 July 2022. Source: FVC Structured Edge.

The list of banks across the two time periods shows mostly the same universe with Barclays the most significant climber in recent years. This is despite the effect of their recent widely reported decision to temporarily stop product issuance worldwide in order to comply with US regulatory issuance limits. The biggest absentee today is undoubtedly Investec. Investec had entered the market in 2008 and redefined the way that structured products were issued in the UK. Despite being a smaller bank in global terms and with a low credit rating it achieved enormous success particularly in the deposit sector of the market. Given Investec’s high funding spread and appetite for capital, structured product issuance was the perfect solution to raise cash while issuing attractive products and taking advantage of the industry investor protection scheme (FSCS).

In the last few years it was apparent that Investec saw structured product issuance and other banking operations as less attractive and their product range had consistently scaled back before announcing total exit in April 2021. Since then other plan managers have taken advantage of the opportunities available and now the UK market is in a healthier and more diversified position supported by many top investment banks.

The three most active distributors in the UK market today are Walker Crips, Meteor and MB Structured Investments (MBSI) and a total of ten firms now distribute into the UK market.

It is interesting to examine the way that these three distributors approach their product issuance. MBSI distributes products issued by Barclays giving them an obvious identity. While Barclays do not exclusively issue for MBSI in the UK, the vast majority of their programme is through them. By contrast both Meteor and Walker Crips have a wide panel of banks that they regularly use as issuers. 

Figure 2 – Issuers used by the two largest UK distributors (last 12 months)

Both distributors rely on a single investment bank (Citi for Meteor, HSBC for Walker Crips) for almost half their pipelines and then spread the rest around five or so other banks. Aside from the two banks that take one top spot each Morgan Stanley account for the next highest total.

This arrangement means that distributors can offer different products to their clients and can take advantage of the best pricing for different underlyings, risk levels and market cycles. It also means that clients can rely on a distributor to be open market and allow diversification of issuer risk.

In summary we see that the UK market is in a buoyant state with many different investment banks and distributors serving investors with a varied and open market encouraging competition and targeted solutions for income and growth.

Tags: Structured Edge
A version of this article has also appeared on www.structuredretailproducts.com

Image courtesy of:     Collins Lesulie / unsplash.com