Growth replaces income in UK products as providers apply RDR principles

The Retail Distribution Review is already having an impact on structured products in the UK if new products launched this month are anything to go by

UK market turns to growth

Defensive growth products are taking the place of income-based products in the UK structured products market as the implementation date of the Financial Services Authority's Retail Distribution Review (RDR) approaches.

Cater Allen Private Bank, Gilliat, Morgan Stanley, Barclays and Investec have all launched growth products in the past two weeks, with Barclays and Gilliat introducing gilts and hybrids, respectively, in their latest issuance. "Growth products have simpler structures, so applying RDR principles – extracting commission, for instance – is easier," says Nev Godley, vice-president at Morgan Stanley in London.

"Rather than offering investors the chance to kick out if the FTSE 100 is at or above its initial level, as is the case with many traditional kick-outs, the barrier for the FTSE Defensive Bonus Plan 2 is set at 90% to increase the likelihood of investors receiving growth returns," says Godley. "Appetite for defensive products is also reflected in the ongoing popularity of our Booster Plan series, which offers positive returns even if the FTSE 100 falls as much as 50% over the term."

Cater Allen has also boarded the defensive growth bandwagon with a product that offers investors 120% participation in the FTSE 100 with 100% capital protection. "It will appeal to investors looking for wealth preservation as well as access to potential market upside," says Peter Beavis, sales director at Cater Allen Private Bank in London. "As there is no cap on this structured deposit, this also means unlimited potential returns in line with growth in the FTSE 100."

In an attempt to give advisers a preview of what commission-free structured products look like, Investec has launched two non-commission versions and two identical commission-based versions of its FTSE 100 Enhanced Kick-out and FTSE 100 Kick-out Deposit plans. The five-year FTSE 100 Enhanced Kick-out Plan 29 kicks out at the end of years one, two, three or four if the index is higher than its initial level on the annual observation dates, with a potential return of 13% per annum for the commission option and 16.2% per annum for the non-commission-based option.

The removal of commission from the plans results in a higher coupon for investors

"The removal of commission from the plans results in a higher coupon for investors," says Pascale Ferreira, derivatives structurer at Investec in London. "Investors will now be able to see the benefits and constraints of the new fees-based model and compare it to the commission-based model."

Elsewhere, Barclays has launched the gilt-backed FTSE 100 Autocall, which offers returns significantly higher than current deposit rates. "The investment is collateralised using UK gilts and may appeal to investors seeking to diversify their counterparty exposure," says Lisa Chaudhuri, head of UK investor solutions at Barclays in London. "Should the market fall continue, the starting date in June could prove to be an attractive entry point."

Chaudhuri says investors will receive rolled-up returns on the first anniversary on which the FTSE 100 is equal to or above its initial level. So, for example, if the index satisfies these conditions on the first anniversary investors will receive 8.25%, on the second they will receive 16.5% and so on until the sixth and final year, when they will receive 49.5%.