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Provider Q&A

With Ross Trotman, Head of Structuring at Hartmoor

How did you get into working in the Structured Product industry?

My first position in the structured products industry was working in the structured equity derivatives team at Investec, which designed and distributed structured products for a number of different areas, but predominately the UK retail market. I was a senior structurer in that team and was there for about seven years. We delivered a wide variety of products, had a range of client types and it was a good place to train and build knowledge. At the end of December 2014, one of the opportunities I came across was to set up a new structured products business with a former colleague of mine from Investec Mike Newman.

This opportunity was for Target, who are one of the best known structured product administrators. They aspired to go into product manufacturing as they wanted to start driving product rather than relying on servicing product. So they hired in myself and Mike to build a business there, which is what we’ve done under the Hartmoor brand.

What is the most challenging part of working in the Structured Products sector?

I’m predominantly focused on retail which has a range of challenges facing the market. One of the biggest challenges is keeping up with regulation, not only from the UK, but also from Europe. Keeping up with regulation is a much bigger focus than it used to be. We have to decide about how we show charges, how we measure risk, how we deliver the KIIDs and the UKSPA has done well in terms of coming in and helping with this process. Under PRIIPs the creation of the KIIDs should help structured products to be compared against other investments. At Hartmoor we want to be proactive, rather than reactive to regulation.

Another main challenge, not specifically to retail, is the pricing environment right now. It’s quite a difficult time at the moment, and as we offer structured deposits, where not many are doing so, interest rates are extremely low and so it makes it harder to launch deposits which are attractive. It does generally also mean that fixed rate deposits that structured deposits are benchmarked against will offer lower returns, but regardless the interest rate environment makes it challenging.

What is your favourite part of working in the industry?

My favourite part is dealing with products right from inception to distribution. Previously, I was involved in mainly just product development, but in my current role I am involved from product initiation, including governance, distribution and through to customer service. As we’re a smaller firm, we can be quite proactive and develop products quite quickly, without of course cutting corners on governance.

How would you like to see the industry progress, including what aspirations should there be?

I think it would be good for the industry to have more active issuers in the retail market to give customers more choice. The market now looks pretty crowded with providers offering similar products with tweaks to make them different. Over the last few years, there has been contraction in the market with issuers pulling out partly due to the demands of regulation and governance. We were able to bring a new deposit taker into the market, which hasn’t been done for a long time.

What are the main challenges facing the industry right now and what action do you think the industry should take collectively to overcome them?

Products are generally transparent in terms of the potential returns on offer, but what the industry has struggled with is explaining the charges clearly, including how they are calculated and how they can be compared with other investments. Sometimes costs change between issues, as the pricing environment influences the charges. We’ve been involved in some working groups with TISA in terms of how we explain charges to advisers and hope that the industry generally raises its game.

What is your advice for finance professionals considering investing in structured products for their clients?

I always try to encourage people to ensure they understand the nuances of each individual product and its potential outcomes. With the tricky pricing environment, we have seen more complex products come to market, structured as such to provide that extra premium. Advisers need to understand what adding an extra a second or third index, does to the risk profile of a product. Do advisers and clients know why some providers use the EUROSTOXX 50 as opposed to the S&P 500?

How do you think structured products benefit investors over and above other investments on offer?

Structured deposits offer an alternative for savers beyond traditional deposit accounts. If they are prepared to exchange their fixed rate returns for those dependent on the stock market, they could get better returns than those currently available on fixed rate bonds for example, which are quite low.

Overall structured products are most beneficial because we can create bespoke investment solutions. Even if you don’t have a bespoke solution, you have a product where the returns are defined and can be delivered on pre-set dates and this is useful for portfolio planning. Potential returns are defined at outset, which can help with tax planning.

How would you explain how a structured product works to a new investor?

A structured product is basically a bond and equity option (or combination of). The bond element is typically what provides for the capital return at the end, which could be a deposit or note. The customer is effectively lending their money to the issuer/deposit taker which they promise to return at maturity. The issuer/deposit taker uses this money to fund assets and buy options in the market, which gives you your upside. If you understand these two elements, then these are the basics that are necessary to understanding a structured product.

Where do you think the industry will be in 10 year’s time?

It would be great if structured products were far more integrated into customer portfolios for instance if structured deposits were seen as a logical cash allocation for some investors. I’d like to see structured products as a real choice for investors and serve as a complement to other investments within a portfolio with the defined returns on offer. I see KIIDs as helping this process in making structured products a credible alternative to other investments.

Whether we will get there will be dependent on a few things. This includes whether other industries will have to do the same level of governance that we will have to do and there is a more level playing field. Also, it would depend upon whether market conditions are favourable to pricing, in terms of volatility and higher interest rates. People often consider structured products as being a satellite holding and tactical investment rather than core which is where they can be as well.