Central Bank review of Retail Structured Products

The CBI has issued a CEO letter (attached) covering the current wave of RSPs being marketed here.
There is much to chew over. I take out just one quote to see whether AAM contributors might be interested in further discussion of this subject.

Letter from CBI re RSPs said:

Reconsider whether the target market has been refined to a sufficiently granular level to ensure it only captures those clients with the required levels of risk appetite and expertise to understand such features

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Well taking the recent example of the BCP Target Coupon Bond (covered here) if the target market was so refined that clients understood its features we would be restricted to a few actuaries and the like and they wouldn't touch it with a 40 foot pole. Why not just ban such products without all this guidance which the manufacturers and distributors of these products will easily ignore just as they have ignored their MiFID requirements in this space for the last many years.

NIt doesn't sound like they are going to do anything about it other than ask firms to be more careful - what a load of .......

Duke of Marmalade said:

Why not just ban such products

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That really is the only answer. Unfortunately, the Central Bank does not have the confidence or competence to do so.

I suspect that they don't understand the products either.

As with mortgage rates, their attitude is that if there is full disclosure, the consumer is protected, which is nonsense.

Brendan

I brought the BCP bond to their attention and met them to give them my opinion on it. Due to the confidentiality laws, it was a one way conversation - they could not tell me what their thinking was.

But my argument was that if anyone understood this product, they would never buy it. Therefore the only people buying it were those who did not understand it.

Brendan

Brendan Burgess said:

I brought the BCP bond to their attention and met them to give them my opinion on it. Due to the confidentiality laws, it was a one way conversation - they could not tell me what their thinking was.

But my argument was that if anyone understood this product, they would never buy it. Therefore the only people buying it were those who did not understand it.

Brendan

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Got it in one Brendan

Duke of Marmalade said:

if the target market was so refined that clients understood its features we would be restricted to a few actuaries and the like and they wouldn't touch it with a 40 foot pole.

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Brendan Burgess said:

But my argument was that if anyone understood this product, they would never buy it.

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One of the reasons why I didn't sell these products is that they are so complex, it is impossible to explain it to a client in a way that they would understand. As rates went down, the products became more complex in order to maintain the guarantee and the headline rates. As the Duke has said, only a few actuaries will truly understand how these things work. There is no way that most (all) of the financial advisors who sell these products know how they work. and the target market of these products is those who traditionally like to keep their money on deposit. These are unsophisticated investors who aren't knowledgeable in the area of personal finance and investing. In other words, they are easily duped.

I would expect lobbying by "the industry" to keep these products, saying they are a useful investment product for those who want a capital guarantee.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

They should be banned except for sale to Qualifying Investors - that would get rid of them for once and for all

The Central Bank lacks the guts to do this

That's a shocking letter from the Consumer Protection Division.

I would challenge Miriam Dunne and other heads in that division to come on here and answer questions from all of us on one of these products based on the brochure provided by one of these firms..... I bet they couldn't answer them without going back to to actuaries or financial analysts...

Steven Barrett said:

I would expect lobbying by "the industry" to keep these products, saying they are a useful investment product for those who want a capital guarantee.

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Hi Steven
The problem is that often there isn't any capital guarantee, despite impressions to the contrary. To take the BCP Target Coupon Bond 3, Brian Woods and I (more correctly Brian, who is expert on stochastic simulations) calculate that there is a c20% chance of investors losing c60%. (The very least they can lose if things go pear-shaped is 50%). BCP haven't disagreed with our calculation. Yet the brochure shows over 2,000 "simulations" of "past experience", every single one of them showing investors getting 5% a year and their money back in full after three or four years.

I’m glad they brought up the “decrement index” which is one of the most sneaky parts of this. They are setting up punters to lose money. It reminds me a little bit about Paulson and Goldman Sachs CDO where Paulson got to chose the assets that were likely to fail and give him a good payout.

As has been mentioned, the CBI have the right to ban these (binary options were banned) but I think are reluctant to move unless there was a pan EU ban (which was the case for the binary options).

Thanks to Colm, Brian and Brendan for their efforts on this.

Okay, so there seems some interest in this topic.
As it happens BCP have Target Coupon 4 up on their website this morning. Substantially the same as Target Coupon Bond 2, discussed above. Below is their piece on back-testing which has not changed since TCB 2 except, for example, the number of daily overlapping back-tests has increased from 1,939 to 2,299. But the essential message that in absolutely no back-tests did the punter failed to get her 5% coupons plus 100% of her investment back.
This is what the CEO letter says about back-tests.

CEO Letter said:

. Where past performance (back-testing) information is presented, firms must ensure that it is fair and balanced, supported by clear narrative and context, and does not diminish the potential likelihood of capital loss. Care must be taken to avoid presenting an overly optimistic or unbalanced picture of the likely investor outcomes.

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I leave it to the viewers to decide whether TCB 4 follows these fine aspirations. The Central Bank have given the Board of BCP (et al) till the end of Q3 to contemplate their navels on these matters. Meanwhile TCB 4 closes on the 17th June.

I am just catching up on this now.

MiFID II also requires firms that manufacture financial instruments to ensure those instruments are designed to meet the needs of an identified target market of end clients.
...
The purpose of this letter is to highlight to investment firms the importance of identifying a sufficiently
granular target market for these complex products and to drive improvements in the quality and
transparency of disclosures to investors of the risks relating to SRPs.
...

1. Conducting an assessment of the target market in a proportionate manner, one that
considers the nature and complexity of the product. The more complex the SRP, the more
comprehensive and granular the target market assessment must be.

2. Where complex features are proposed, firms must consider if they are appropriate for the
retail market and whether they are likely to be understood by the target market.


I don't know anyone who would put all of their capital at risk to get a return of 5% a year for three years.

Brendan

Sunday Times article
Sorry behind paywall, moderator please delete this post

Well done Colm and Brian.

No need to delete as it needs to be highlighted.

Could you summarise it?

Brendan

Here is the link, but it's behind a paywall. I will extract some key bits later.