For those new to structured products, the terminology can be a barrier to understanding. This article from Olly Humphrey – Strategic Partnership Manager at IDAD, unpacks the key concepts and features, providing a straightforward introduction to an often misunderstood area of investing.
The world of investments comes with its own language. For those who work in it every day, that can feel second nature. For retail investors, or even advisers and paraplanners new to the space, it can feel overwhelming.
Structured products and structured deposits are no different. They come with their own set of terms that can seem confusing at first glance. The aim of this article is simple: to demystify some of the most common jargon and explain what these terms really mean in plain English.
What is a structured product?
A structured product is an investment whose return is linked to the performance of an underlying asset, such as a stock market index, a basket of shares, or other financial instruments.
The key feature is that the payoff is predefined – investors know in advance how and when they could receive a return, subject to certain conditions being met.
Structured deposits work in a similar way but are structured as cash deposits, often with FSCS protection up to the applicable limits. The main difference is how they are regulated and protected, which we’ll cover later.
Strike date
The strike date is the starting point for a structured product. It’s the date on which the level of the underlying asset is set. This level then becomes the benchmark against which all future performance is measured.
For example, if the FTSE 100 is at 10,000 points on the strike date, that 10,000 becomes the reference level for the entire term of the product.
Observation date
Observation dates are the points during the term when the product is “checked” to see how the underlying asset is performing. These can be set at different intervals, usually annually for growth products, or more frequently (such as quarterly or monthly) for income products.
The outcome on each observation date determines whether certain features of the product are triggered, such as early maturity or income payments.
Autocall (or kick-out) trigger
An autocall, often called a kick-out in the UK, is a feature that allows the product to end early if certain conditions are met. Typically, this happens if the underlying asset is at or above the strike level on an observation date.
For example, if the FTSE 100 is at or above its strike level on the first observation date, the product may “kick out”, returning the investor’s capital plus any agreed return. If not, the product continues to the next observation date.
Coupon
The coupon is the return an investor receives when certain conditions are met. In growth products, this is usually paid when the product kicks out or matures. In income products, coupons are paid at regular intervals, provided the income trigger is met.
Snowball
A snowball feature applies to growth products and means the potential coupon increases the longer the product runs without kicking out. Think of it like a snowball rolling down a hill – it grows larger over time.
For example, a product might offer 8% per year, but if it doesn’t kick out until year three, the investor could receive 24% in total (8% × 3 years).
Memory
Memory is a feature found in income products. If a coupon payment is missed because the income trigger wasn’t met, the memory feature ensures that the missed payment is not lost. Instead, it is “remembered” and paid later when the income trigger is met again, along with the current period’s coupon.
This can be especially useful for clients who rely on a steady income stream, as it reduces the risk of permanently missing out on payments during volatile periods.
Income trigger
The income trigger is the level that the underlying asset must meet or exceed for an income payment to be made. For example, if the trigger is set at 80% of the strike level, income will still be paid even if the market falls by up to 20%.
This feature provides a buffer, allowing investors to continue receiving income even in moderately negative market conditions.
European barrier
A European barrier is a form of capital protection that is only assessed at the end of the product’s term. It defines the level at which the underlying asset can fall before the investor risks losing some or all of their capital.
For instance, a European barrier set at 60% means that if the underlying asset is at or above 60% of its original level at maturity, the investor’s capital is fully protected.
This type of barrier is only checked once – at the end of the term – which means the underlying can fluctuate significantly during the product’s life without affecting the outcome.
Maturity date
The maturity date is the scheduled end of the product’s term. This is where the final outcome is assessed. Whether that’s the return of capital, a final coupon payment, or the result of a European barrier check.
Some products may end early due to an autocall feature, but if they run their full course, the maturity date is when the investor receives their final payoff.
Structured deposits vs structured products
It’s important to understand the difference between structured deposits and structured products.
Structured deposits are cash-based investments. They are typically offered by banks and benefit from FSCS protection up to £120,000 per person, per institution, in the event the bank fails. This makes them a lower-risk option, though returns may be more limited.
Structured products, on the other hand, are investment products. They can offer higher potential returns and more flexibility, but they do not carry FSCS protection. Instead, they rely on the creditworthiness of the issuing bank.
If the issuer were to fail, investors could lose some or all of their capital, even if the product itself was designed to be capital protected.
Understanding FSCS protection and counterparty risk
FSCS protection is a key consideration when choosing between structured deposits and structured products.
- FSCS protection applies only to deposits, not to investment products.
- The limit is £120,000 per person, per authorised institution.
- Protection is only available if the provider is a bank or deposit-taker with the appropriate licence.
- If the provider is not a bank, or does not have the right licence, FSCS protection does not apply, even if the product is marketed as “capital protected”.
This means that the strength of the counterparty, the bank or institution issuing the product, is crucial. Investors and advisers should consider the credit rating and financial stability of the issuer, especially for products without FSCS protection.
A flexible tool for the right client
Structured products and deposits are not one-size-fits-all. They offer a high degree of flexibility and can be tailored to meet specific client needs, whether that’s generating income, protecting capital, or gaining exposure to market growth with defined risk parameters.
When used appropriately, they can be a valuable part of a diversified portfolio, especially for clients who want predictable outcomes and are comfortable with the trade-offs involved.
As with any investment, the key is understanding the features, the risks, and the role the product plays in the broader financial plan. With the right advice and clear communication, structured solutions can help clients achieve their goals with confidence.
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