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It has been three years since Lehman Brothers filed for bankruptcy, creating the biggest banking failure in history and sending shockwaves through global markets.
Thousands of UK IFAs and their clients, who held Lehman-backed products lost money overnight with many yet to reclaim a penny.
So on the third anniversary of that fateful day for the finance industry, what effect has Lehmans’ collapse had on adviser attitude to counterparty risk?
Alan Dick, principal of Forty Two Wealth Management, was always sceptical about counterparty risk products.
He avoids structured products and instead focuses on selling “easy to understand, transparent” vehicles to his clients. He says the collapse of Lehmans has only made him more sceptical about counterparty risk products and he believes IFAs are a lot more conservative today and avoid taking risks.
“I think a lot of advisers didn’t realise the risks and now are more aware of them,” he says.
“Counterparty risk is, in most cases, an unnecessary complication that leaves us and our clients open to additional and unquantifiable danger.
“You can very easily end up with a chain of risk where nobody really understands where the liabilities rest. If we can’t explain a product to clients in under a minute, then we won’t use it.”
Martin Bamford, managing director of Informed Choice, has also always been wary of counterparty risk. According to him, the collapse of Lehmans simply “highlighted a risk that has always existed”.
He says: “It is probably no more relevant today than it was five years ago, although awareness of this risk is greater. We would always avoid exposing our clients to any counterparty risk where a reasonable alternative existed.”
Meanwhile, some IFAs say while they are more wary following Lehmans’ collapse, they still recommend vehicles, such as structured products and ETFs to clients.
Daniel Cawley, partner at 121 Financial Services, says advisers should not automatically rule out such investment products.
“Counterparty risk isn’t the big bad wolf,” he says.
“The fact a product contains counterparty risk doesn’t mean it is the devil and it shouldn’t ever be recommended. You just have to make sure the client is fully aware of what the risks are.”
However, Dave Penny, managing director of Invest Southwest, says Lehmans has exposed counterparty risk and the “inappropriateness” of structured products to the industry.
But even so, advisers appear to now favour the products, he says, with more structured products entering the market.
He says: “Counterparty risk is merely a factor which should awaken the senses of the advisory community to the inappropriateness of structured products.
But in a volatile market when clients are nervous, structured products can really play to their fears and they will buy them.”
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Three years on, FSCS still not making sense
Three years since 6000 UK investors lost their savings in Lehman-backed products, two years since FSA investigated and reported 'widespread mis-selling', and one year since FSCS finally announced its position to those with capital at risk structured products. FSCS is generally unwilling to compensate those mis-selling victims, though there have been some successes. Anyone with an interest in this can join the action group, run by Lehman mis-selling victims. missoldinvestments.co.uk
Posted by: Missold
Counterparty Animal
I thought advisers understood counterparty risk 3 years ago and chose triple A rated companies. It was the ratings agencies that who failed to describe their risk properly. It seems to be a common myth now that anyone who loses money, can claim compensation.
Posted by: MarkG
Lateral Thinking?
It seems to me that the previous comments offer a reasonable but narrow view as they seem to refer solely to structured products. There are many areas where such risks need to be addressed; one which comes to mind is the practice of some ETF managers to both lend stock and to use synthetics rather than true replication. Sure they will tell you - if you ask.
Posted by: David Cowell, Myddleton Croft
SPGO
Let’s be clear, counterparty risk is not solely a structured product related issue. It exists in corporate bond funds, ETF’s even right down to putting your money in a bank account once you go over the FSCS protection level. As for product complexity, the vast majority of people would struggle to explain the strategies of an absolute return or corporate bond fund within 1 minute, yet they are sold in droves.
Posted by: Ben Murison (SPGO)
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Do they want to........
Before reading this article my answer to the question would have been yes, evidenced by the fact that between 2008 and now the market for Structured Deposits and Structured Investments has almost doubled. Having read the article fully, now twice, I still find it staggering, not to mention disappointing, that the misunderstandings and prejudices that existed before "lehmans" still exist now, even after the extensive and continuing work being carried out by all participants in this space. With this in mind, we need to avoid using the generic term, "Sructured Products"!Do we refer to traditional investnments as "OEICS" or "Unit trusts"?? No we dont becasue the terms are irrelevant. We should be describing them as Structured Investments and then drawing the comparisons in a sensible way. Counterparty risk is not an unneccessary complication and the term "unquantifiable danger" is grossly inaccurate. The polar opposite is in fact true; Structured Investments offer "pre-defined" upside as well as downside, something traditional investments are simply unable to do. The problem, as is evidenced by some of the comments in this article, relate to the misunderstandings and ultimately, misrepresentations made in relation to the industry in general and/or the products themselves. All of the risks relating to a Structured Investment's upside, downside and counterparty exposure can be fully explained and indeed quantified, it simply takes a little time and effort but to ignore the entire entire sector I believe is doing clients a mis-service. I have no issue with investment preferences or investment opinion but with a little more lateral thought and less of the sensationalist remarks we may all actually learn something and who knows, even pass some of these benefits onto clients?
Posted by: Gary Dale