Structured Products Complexity AssessmentMarch 09, 2015 - 09:26
Structured Products Complexity Assessment
To score our
products we have adopted a complexity scoring system designed by FCA’s Complex
Products Specialists Team specifically for structured deposits in 2013. This
scoring system was designed after an extensive review of UK structured product
market and aims to span a range between the simplest (score 1) and the most
complicated products on offer (score 6).
complexity score is assigned based on the presence of individual features and
combinations of features. The key drivers for complexity within structured
products identified are:
of features – the more features a product has, the more difficult it is to
understand the impact of the combination of those features
of a feature in isolation – how the feature affects the performance or
profile of the product; these can individually vary in complexity, and
between multiple features – some features may function relative to one
other; others may be non-correlated.
complexity scale is based on the baseline measure (the simplest product) as
either a FTSE100 product with a binary output or a FTSE100 product with 100%
participation. It is not possible for a product to have less features or be
based on a more recognised index (the FTSE), the FCA research has demonstrated
that although there were significant numbers of participants that did not
understand the structure of the FTSE, these products were generally the most
additional feature, there is a degree of corresponding increase to complexity
(based on an assessment of the understandable/measurable effect to the
potential return). For example, adding a cap to the above product will increase
complexity but to a lesser degree than adding a set of path dependent payoffs.
features are determined to be highly complex due to the unpredictable effect
(from the point of view of the consumer) they have on the product performance.
These include features such as synthetic indexes, which due to their ‘unknown’
nature, would prevent customers from understanding the impact they may have and
their effect on any potential returns.
establish the effect a feature (or combination of features) may have on
complexity, two related exercises were carried out:
individual feature was rated on a scale of complexity in isolation (Table 1)
mechanism was developed to establish how combinations of features may affect
the overall level of complexity (Table 2)
1. Complexity of individual features of structured deposits
2. Categories of complexity of structured deposits based on features and their