Defend the investor and open up the markets

The minute I heard Keydata had hit the buffers I could feel the pen of a certain Mr Peter Hargreaves a'quivering. I could almost hear Peter intoning here was proof, if ever it was needed, that all those structured product types were not to be trusted and slightly spivvy.

I am sure outfits like the IMA are already readying learned submissions suggesting structured products providers in general should be taken out by the regulators en masse and executed Pol Pot style to defend the poor benighted British private investor.

I, on the other hand, draw some rather different conclusions from this constantly evolving story.

The first is that the structured products sector will continue to prosper - there are good providers and bad providers, good structured products and rotten structured products - but the really big investment bank boys will increasingly dominate the space as they deploy scale and their privileged regulatory position. Whether this is good or bad news I have no idea - only that the demise of any independent product providers pushes more and more high street investors to use the absolutely atrocious products offered by the likes of the NS&I and the big building societies.

My next conclusion is that I think the whole life settlements niche is going to have an even tougher time selling their idea into the mass market. None of us know at this stage whether the underlying investments in Keydata's hugely successful Secure Income Bonds built around US life policies directly contributed to the whole affair, but I think whatever happens the whole niche will be tarnished. I have long had my severe doubts about the underlying demographic models used by some of the providers to justify the payout projections and Keydata's early run-ins with its consultants always left me on my guard. Keydata's subsequent demise will inevitably result in rumours that something may have been amiss with income products.

Keydata's demise also came in the week that Invesco Powershares in the US declared it was closing 19 ETFs including many of the funds that tracked the RAFI and Dynamic indices.

What seems like a great idea on paper - I absolutely buy the logic of fundamental indexing - does not seem so compelling when you consider how little money was actually under management. The link back to Keydata is obsolescence - funds and fund managers are falling fast and advisers now need to tread with extreme caution in recommending any investment idea or provider that looks a bit too alternative. Already many small boutique investment management firms are under threat and any attempt by new entrants to start selling new styles and themes is going to run into even more resistance from advisers who will favour scale, marketing spend and reputation over new ideas and chippy marketing. And that for me is the last corrosive effect - as any good Schumpeterian will tell you, the current global process of creative destruction is all about removing excess capacity and making sure the survivors are stronger than ever. But in a market very heavily regulated, that creative destruction process could actually lead to very dangerous outcomes, with effective oligopolies using their marketing might to totally corner the market, strangle the distribution channels and generally encourage the regulators to make sure consumers are 'protected' by scale.

Of course, the FSA has a duty to defend investors and if the ArchCru and Keydata affairs tell us anything its that they do need to take a proactive stance in defining what constitutes a 'liquid' asset or how a product is tax-structured, but they also need to then double back and open up competition in the marketplace by closely examining the distribution platforms and incentive structure I maintain is strangling the industry. So, by all means defend the investor by closing down egregious outfits but then open up markets by forcing the wrap networks to evolve and investigate commission trails and incentive structures.

David Stevenson is a Financial Times columnist and consultant. Email him at davidcstevenson@gmail.com

Categories: ETFs | Equities | Investment

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