ASIC has released Report 340 ‘Capital protected’ and ‘capital guaranteed’ retail structured products (REP 340) which contains a health check of the Australian market for unlisted retail structured products promoted as having capital protection or a capital guarantee.

The report found retail investors often have a poor understanding of these complex investments because of the way that some of these products are labelled, with confusing or potentially misleading messages about the level of risk investors are exposed to.

The use of terms such as ‘qualified’, ‘limited’, ‘conditional’ or ‘contingent’ in conjunction with the phrase ‘capital protected’ or ‘capital guaranteed’ may not be sufficient to avoid the phrase as a whole being likely to mislead or deceive consumers about the risk to their capital, particularly where, if certain conditions are met, the whole of the capital will be at risk.

Despite being labelled or described with terms such as ‘capital protected’ and ‘conditional capital protected’, some products have knock-in clauses and performance hurdles that may lead to investor losses. The report highlights concerns around:

• the accuracy and balance of advertising for these products
• the labelling and description of reverse convertible products as offering ‘conditional capital protection’ or ‘conditional protection’. The value of these investments is usually linked to the worst performing reference share, meaning investors could lose some or all of their money, and
• certain ‘internally geared’ structured products that are described as entailing a compulsory capital protected loan, where all of the investor’s outlay is at risk of loss if reference assets don’t perform. Where the investment exposure is ‘notional’, there may also be risks for investors who claim tax deductions on their payments.

If significant issues in the market persist, ASIC will consider appropriate regulatory options, particularly in relation to the description of medium-risk and high-risk financial products using terms such as ‘capital protected’.