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Introducing the UKSPA Risk Ratings

Zak de Mariveles, Chairman of the UK Structured Products Association, talks about how the new UKSPA Risk Ratings should be a useful tool for advisers looking to match products more closely to their clients’ needs.

As a financial adviser, you work with your clients to build portfolios that meet their investment needs. This includes making sure that you understand each client’s appetite for risk and suggest products that are appropriate given this understanding.

This means that the more help product providers can provide in making comparisons across products, the easier it is for you to assess the suitability or appropriateness of that product for a client.

Whilst such ratings have been in place in the funds industry for some time, in the form of the Synthetic Risk Return Indicator (SRRI) found within the KIID document for funds, up until recently no such ratings were available for structured products.

At the start of February 2015, the UK Structured Products Association (‘UKSPA’) announced that it would start providing a UKSPA risk rating for all members’ products, using a volatility-based calculation methodology similar to the Synthetic Risk and Reward Indicator (‘SRRI’) used by the fund industry, but adapted for structured products.

So, what does an UKSPA Risk Rating look like?

It is a two-dimensional rating, reflecting both the market risk and credit risk of a product. The market risk rating is calculated based on the volatility of the underlying asset, and ranges from 1 to 7 (similar to the SRRI rating used by the fund industry). The credit risk rating is based on the credit rating of the issuer or deposit taker, and ranges from A to G.

For example, if you see a product with an UKSPA Risk Rating of 2F, that product includes low levels of market risk, but high levels of counterparty risk. Similarly, a product scored at 4A includes medium levels of market risk, but the lowest level of counterparty risk.

For those interested in the full methodology to calculate the ratings, a guide to the ratings is available from the UKSPA website and can be accessed by clicking here

The UKSPA Risk Ratings have initially been introduced in response to demand from advisers, however going forward they can have a much broader application for the industry. For example, the industry can start talking about structured product performance of various payoff styles (such as kick-outs or auto-calls) in reference to these ratings, which is a much more useful and informative way of analysing performance rather than looking at blanket performance across all product types.

They also demonstrate a major step in the direction that regulators are clearly looking for, namely for a risk rating that encompasses all types of investment. Whilst the details of PRIIPs and a universal risk rating are still being determined, UKSPA has taken a logical approach in adopting a methodology similar to that found in the funds industry.

UKSPA Risk Ratings will be added to products on StructuredProductReview, but remember that they are for use by financial advisers only.