RBS structured product dismissed by advisers

Advisers have dismissed a new structured product from Royal Bank of Scotland (RBS), designed to capture growth in the FTSE 100 over five years.

RBS Investment Fund 7 UK Accumulator offers a minimum return of 8.5 per cent for every year it remains active, but will close early and pay up if the FTSE is at the same level or higher on any of the five anniversary dates.

Mark Dampier, head of research at Hargreaves Lansdown, said: "What's the point? We're in the weirdest economic environment most of us have ever seen. Who wants to lock their money away for a potential five years?

"There's no dividend, you can potentially make an overall loss, and it's run by a bank – banks vastly oversell this type of investment, when investors can really make them up themselves."

Counterparty risk was a major concern for some advisers, who said the extent of this risk was unclear because of the bank’s uncertain future following its part-nationalisation in 2008.

"One thing investors must be confident of is the underwriter's ability to pay out," David Wynn, investment director at RSM Tenon said.

He added: "A potential five year tie-in not only leaves the investor with liquidity issues, but doubts on the underwriting company. Who knows how RBS will be structured in five years?"
 
Gavin Haynes, portfolio manager at Whitechurch Securities, added: "Counterparty risk is always something investors need to keep in mind with structured products.

"As RBS was not allowed to fail in 2008, it would be surprising to see it default in the future. But no one foresaw the problems with Lehman Brothers, either," he added.

In its brochure for the Investment Fund 7 UK Accumulator, the bank says it uses a collateral arrangement to secure the investment.

"In the unlikely event that RBS plc were to default or go bankrupt, this collateral would be used to enable investors to recoup at least some of their money. Whilst the collateral may not cover the full value of the investment fund, it aims to cover at least 90 per cent of the value of the investment fund at all times," it said.
 
The bank declined to comment.