Investors Lack Understanding of Structured Products

An SFC survey has found that many investors who purchased unlisted, retail structured products for their perceived higher returns did not fully understand the nature of these products.

For the first time, the SFC has conducted a Structured Product Investor Survey to understand investors’ objectives of investing in structured products, their level of knowledge and whether they made profits out of their investments. 207 investors who invested in structured products during the last two years were interviewed by telephone in June 2006 (Note 1).

Investment objectives

Investors bought structured products primarily for perceived higher returns, either comparing to bank deposits of a similar term (42.0%), or other investments such as direct investments in the underlying assets (28.5%). Almost nine out of 10 investors purchased their structured products through banks and equity-linked products were by far the most popular. Almost three-quarters of investors interviewed made a profit or broke even in their investment in structured products in the previous 12 months.

Level of knowledge

The survey results suggest a lack of understanding of structured products since nearly 30% of investors interviewed purchased these products for capital preservation or perceived them as low risk investments. Furthermore, nearly half of equity-linked product investors did not realise that with a bull equity-linked note, they would receive stocks instead of cash if the price of the underlying stock dropped below the strike price on the valuation date.

Understanding of product information

Only around 11% of investors in equity-linked, credit-linked or index-linked products (Note 2) recalled having received, read and fully understood the offering documents. Those investors who could not fully understand the offering documents said that they contained too much jargon.

Sales process

Where sales representatives were involved, investors in equity-linked, credit-linked or index-linked products were generally satisfied with the product explanations provided. However, a significant number of investors did not recall receiving advice from their sales representatives while other investors noted difficulty in understanding sales representatives’ explanations due to product complexity and the use of jargon.

Mr Martin Wheatley, SFC’s Chief Executive Officer, said: “It is risky for investors to buy an investment product that they do not fully understand. Given the proliferation of structured products and their increasing complexity, the SFC will continue its on-going risk education to retail investors. We have today issued a Dr Wise article on retail structured notes to remind prospective investors issues that they should consider before investing in these products.”

“We have also issued a circular today to alert issuers and their selling agents to the results of the survey and to request that they pay particular attention to ensuring that investors understand the risks of these products, ” he said.

The report of key findings of the Structured Product Investor Survey is available at the SFC office and on the SFC website under “Speeches, Publications & Consultation” – “Publications” – “Surveys and Reports”.

Ends

Notes:

1. “Structured products” in this context refers to unlisted synthetic products targeting retail investors.

2. Not every structured product is under the SFC’s regulation. This group of investors was chosen because the offering documents of equity-linked, credit-linked or index-linked products require the SFC’s approval or authorisation while the offering documents relating to currency-linked and interest rate-linked deposits do not. The size of this group is 178, 86% of the total.