These structured products are usually issued for a term of 5 years. The capital is protected or guaranteed. The investors were told that the capital is protected and they can earn a higher rate of return.
To provide the capital protection, about 80% of the money is invested in a low risk bond to produce the capital return on the maturity date. Of the remaining 20%, about 10% is taken away as expenses, distribution cost and profit for the issuer. The remaining 10% is used to buy an option that has a small chance of earning a high return, but a larger chance of returning nothing.
Most investors of these products got back only their capital after five years, with little or no gain.
If the investors had bought the low risk bond, they would have received a return of 20% for the 5 year period. The financial institutions did not want to sell the low risk bonds as they earned a small fee compared to the structured products (which paid a higher commission).
To be fair, some distributors were not aware that the products were bad products. They were only concerned about earning the high commissions for distributing the products. They failed in their duty in giving the proper financial advise to their customers.
During the period that these products were sold, the retail customers must have invested several billions of dollars and lost several hundred millions in the return that they would have obtained by investing in low risk bonds. Unfortunately, the financial institutions were not held accountable for selling these bad products.
Tan Kin Lian
