What to do with the legacy book?
Over the last few years, the number of structured solution providers has reduced as banks, building societies and brokers pull back from the market. As a result there are a number of legacy books of business that will need to be serviced by those firms no longer offering structured products.
Over the last few years, providers such as Incapital, Jubilee Financial Products, Merchant Capital and a number of building societies appear to have have pulled back from the market. According to structuredretailproducts.com the number of provider groups in the UK market halved from 67 to 34 between 2008 and 2012, whilst the number of issues fell by one fifth.
Firms are faced with the choice of maintaining the existing portfolio or selling it to another provider. Whilst there may be a temptation to do the minimum, the new FSA guidelines on structured investments require that firms fulfil their post sales responsibilities for new and legacy products. The FSA has confirmed that the new rules apply to all structures that have not matured.
Maintain the portfolio
The new FSA product development guidelines issued a year ago require providers and plan managers to support structured products post sale. They include ensuring the solution continues to meet the needs of target clients. The performance of the underlying strategy is consistent with that envisaged by the marketing materials. Distributors and customers should be kept up to date on the product. Providers should make changes to the product development process and where necessary to the structure itself if required. To perform these functions well the manufacturers, administrators and distributors of a product need to work closely together.
The FSA also require that firms have sufficient resources in place to deal with ongoing queries from distributors and clients. They remind firms that they retain regulatory responsibility for activities that are outsourced to a third party. This means that firms cannot simply let the legacy book of business tick over. Hence, there will be an ongoing cost to taking the maintenance option. Of course, the provider and distributor will have made money when the product was launched but they may not continue to do so over it’s lifetime. The administrator may be receiving a regular fee or have taken an upfront lump sum.
Sell the portfolio
One option for the surviving providers in the market is to buy the legacy book from the organisation that is pulling back. However, the immediate effect is often to incur a cost for transferring those portfolios to their new administrators and maintaining them. There may be some ongoing trail product income to be paid by the investment bank behind the products but this is unusual. Most firms tended to take fees upfront. Which may explain why they have left the market but that is a different discussion! Hence, taking over a book of business can be a loss leader but it may be worth it!
There is of course the opportunity to offer the acquiring businesses products to the legacy clients but that may take time to work. Waiting until existing products mature and may be rolled over could take too long. Given what has happened to markets recently the maturing product may have paid off but the new alternative may not price so well.
With fewer players in the market, the owners of certain legacy books may decide to return to the market. Although the regulatory requirements have changed, they are not insurmountable and there is less competition but also a smaller market.
A third way is reportedly being pursued by Reyker Securities who are the administrators for the Merchant Securities and Incapital books of business. According to structuredretailproducts.com, Reyker have begun to offer structured products http://www.structuredretailproducts.com/news/advanced-search/?strUrlPosition=/news/list/search/keyword/Reyker. The firm also offers share dealing, discretionary management and a range of tax efficient pension and savings wrappers. At first glance this makes sense, as Reyker should still be being paid for providing custody services to investors and be reporting on valuations and performance. Only time will tell whether customers will buy new structures from their administrator but providing they can deliver the right solutions for the right clients and follow the new rules why not?
There are a number of choices for firms with legacy books of business but providing a minimal service is no longer one of them! As the economy recovers and this may take a while, we may see more changes to the supply side of the structured products market!