Navigating Post-Brexit: Innovation and Resilience: Structured Products, Certificates

The United Kingdom’s decision to leave the European Union (EU) has undoubtedly transformed the financial landscape.

Among the affected sectors is the structured products and certificates market, which has experienced significant changes in regulation, market access, and investor sentiment.

Let’s take a look at the implications of Brexit on the European structured products market and examine the current state of the industry in the UK, highlighting its innovative nature and key stakeholders such as issuers, platforms, associations, and exchanges.

The Effects of Brexit on the European Structured Products Market

1. Changes in Regulation

Post-Brexit, UK-based issuers of structured products and certificates are no longer subject to EU regulations such as the Markets in Financial Instruments Directive II (MiFID II) and the Prospectus Regulation.

However, the UK has retained most of the EU’s existing regulations and incorporated them into its domestic law, referred to as “retained EU law.” This means that while the UK is no longer bound by EU regulatory updates, its financial regulations continue to maintain a high degree of similarity with those of the EU.

One significant divergence from EU law is the UK’s implementation of the Investment Firms Prudential Regime (IFPR), which replaces the EU’s Capital Requirements Directive IV (CRD IV). The IFPR introduces new capital and liquidity requirements, remuneration rules, and risk management standards for UK-based investment firms, including structured product issuers.

1. Market Access

Brexit has also affected market access for UK-based issuers of structured products and certificates. Without the benefits of the EU’s passporting system, these issuers must now seek authorization to offer their products in individual EU member states.

This has led some UK-based firms to establish subsidiaries within the EU to continue serving the European market without facing significant barriers. Conversely, EU-based issuers seeking to access the UK market must now comply with the Financial Conduct Authority’s (FCA) Temporary Permissions Regime (TPR).

1. Investor Sentiment

The uncertainty surrounding Brexit initially led to a cautious approach among investors in structured products, with many postponing investment decisions until clearer regulatory and market access landscapes emerged.

Since the conclusion of the Brexit transition period, investor confidence has gradually returned, with a renewed focus on diversification and risk management in their portfolios.

The State of the UK’s Structured Products Industry: Innovation and Stakeholders

1. Innovation

Despite the challenges posed by Brexit, the UK’s structured products industry has proven to be remarkably innovative. New products and strategies have emerged to address investors’ evolving needs, with a focus on environmental, social, and governance (ESG) factors, alternative asset classes, and risk management. The adoption of digital technology has also accelerated, with robo-advisory platforms and other fintech solutions playing a growing role in the distribution and management of structured products.

1. Issuers

These institutions have adapted to the post-Brexit environment by streamlining operations, enhancing cross-border collaboration, and investing in digital solutions to better serve their clients.

1. Platforms

Structured product platforms have facilitated the automation and digitization of the industry, enabling more efficient product creation, distribution, and administration. These platforms have contributed to the industry’s resilience and innovation in the face of Brexit-related challenges.

1. Associations

Trade associations such as the UK Structured Products Association (UKSPA) and the European Structured Investment Products Association (EUSIPA) play a critical role in representing the interests of structured product issuers and promoting industry best practices. They have been instrumental in providing guidance, fostering collaboration, and facilitating dialogue between industry participants and regulators throughout the Brexit process.

1. Exchanges

The London Stock Exchange (LSE) remains a key venue for the listing and trading of structured products in the UK. Despite concerns about the potential impact of Brexit on the LSE’s attractiveness as a listing destination, it has maintained its position as one of the world’s leading exchanges. This resilience can be attributed to the LSE’s strong reputation, robust infrastructure, and its commitment to fostering innovation in the financial sector.

Brexit has undoubtedly altered the landscape of the European structured products market, bringing about changes in regulation, market access, and investor sentiment.

Despite the challenges, the UK’s structured products industry has demonstrated remarkable adaptability and innovation. Issuers, platforms, associations, and exchanges have all played crucial roles in shaping the industry’s response to the new environment.

The UK has been at the forefront of innovation in the design of structured products and certificates, addressing the evolving needs of investors and adapting to the changing financial landscape.

Here are some notable examples:

1. ESG-focused structured products: With the growing demand for sustainable investments, UK issuers have been developing structured products with a focus on environmental, social, and governance (ESG) factors. These products allow investors to gain exposure to ESG-related indices or themes while maintaining their desired risk-return profiles. For instance, Barclays launched an ESG-optimized version of its well-known equity-linked notes, enabling investors to participate in the performance of a basket of ESG-compliant stocks.

2. Innovative alternative investments: As investors seek diversification and alternative sources of return, UK issuers have been developing structured products linked to alternative asset classes such as infrastructure, private equity, and real estate. For example, an issuer introduced a structured product linked to the performance of a basket of infrastructure stocks, providing investors with exposure to the infrastructure sector while offering downside protection.

3. Smart-beta strategies: The UK’s structured product market has seen the emergence of smart-beta strategies, which combine elements of active and passive investment management. These strategies are designed to outperform traditional market-capitalization-weighted indices by considering factors such as value, growth, momentum, and low volatility. UK issuers have incorporated smart-beta strategies into structured products, providing investors with the potential for enhanced risk-adjusted returns.

4. Bespoke structured products: UK issuers have also been successful in creating highly customized structured products tailored to the specific needs of individual investors or institutional clients. For example, an issuer designed a bespoke equity-linked note for a large pension fund, which was tailored to the fund’s specific risk tolerance, return objectives, and investment horizon.

5. Digital innovations: In response to the growing trend of digitization in the financial industry, UK issuers have embraced digital solutions to enhance the efficiency and transparency of their structured product offerings. For instance, an issuer implemented an online platform that allows investors to design, price, and trade custom structured products in real-time, streamlining the product creation and execution process.

6. Multi-asset structured products: The UK market has witnessed the introduction of multi-asset structured products that provide investors with exposure to various asset classes such as equities, commodities, and fixed income. These products offer diversification benefits and can be tailored to different investor profiles and market conditions. For example, an issuer launched a multi-asset autocallable note that provides exposure to equities, commodities, and interest rates, offering both capital protection and the potential for enhanced returns.

These examples illustrate the UK’s innovative approach to designing structured products and certificates, as issuers continually adapt to the evolving needs of investors and the changing financial landscape.

Going forward, it is crucial for market participants to maintain their focus on innovation and collaboration while closely monitoring the evolving regulatory landscape. By doing so, the UK’s structured products industry can continue to thrive and play a vital role in meeting the diverse needs of investors in a post-Brexit world.