Products enough to give you a complex
If Justin Beeton and his miserable Berkshire Hathaway-style products were in Belgium, he would have every right to be very nervous about now.
If Justin Beeton and his miserable Berkshire Hathaway-style products were in Belgium, he would have every right to be very nervous about now.Beeton's Sydney firm JB Global was out there not so long ago selling what was termed "the ultimate Warren Buffett investment".You might think the ultimate Warren Buffett investment would be an investment in Buffett's famed investment vehicle Berkshire Hathaway. Indeed, JB Global and its marketing seemed to invite the perception that was exactly what you would get if you invested in JB Global's "Berkshire Hathaway Income and Equity Accelerator".The website had the gall to include six video grabs from Warren Buffett, courting the inference that the Sage of Omaha was endorsing JB Global's product.Marketing material stated: "You can invest in Berkshire Hathaway without any of the usual risks."At the time, Beeton defended the advertising campaign, saying: "We are investing in Warren Buffett that's what we are doing.'A look under the bonnet of JB Global's product showed it was anything other than a straightforward investment in Berkshire Hathaway shares. In common with many of JB Global's products - often "manufactured" by large investment banks such as RBS - the Berkshire Hathaway product was a complex melange of loans and derivatives.As a sign of the complexity, the Berkshire Hathaway product allowed you to claim tax deductions on the interest of a "loan" to buy the investment. Remarkably, you weren't actually liable to pay the loan back - hence my description of it as a "loan".JB Global is not the only one offering these kinds of complex structured products. For example, Macquarie Bank has been out there with its Flexi 100 products offering similar features.Amazingly, Macquarie won an Australian Tax Office ruling supporting the tax deductibility of interest on what I see as a nonsense loan.In keeping with many of these complex products - and increasing their attractiveness to retail investors - there is often some form of capital guarantee.Such "guarantees" are also a sign of the product's complexity - the guarantees are tightly limited and defined in the fine print of 100-odd page product disclosure statements.JB Global is no longer selling a product tied to Berkshire Hathaway shares. However, it now offers JB Global Superannuation as its "flagship service", offering the ability to invest your super in its range of complex structured products.But I digress. Why would Beeton be nervous were he doing business in Belgium? Rather sensibly, the Belgian regulators have decided to impose a moratorium on complex structured products being sold to retail investors.I say rather sensibly because the Belgians seem to have developed an alarming love affair with these kinds of products, investing ?85 billion in them when they have a total of only ?200 billion invested in shares.The moratorium was agreed to by the product manufacturers ahead of Belgium's Financial Services and Markets Authority introducing tougher regulations governing the area. To determine whether astructured product fits the definition to be covered by the moratorium, the Belgians came up with a four-step process.I'm pretty confident most of JB Global's products would have been nominated as complex after step one, which asks whether disclosure of the underlying value of the product is accessible.But even if JB Global's products somehow scraped through step one, they would almost certainly be judged to be complex in the next three steps:Is the strategy overly complex?Is there an overly complex calculation formula?Is there transparency regarding costs, credit risk and market value?In the case of JB Global's labyrinthine product disclosures, the answers are yes, yes and no.The Belgians' proactive steps to head off what they manifestly see as a looming problem - heavy retail losses and immense value leakage to investment banks - is being mirrored by regulators globally.Chastened by the global financial crisis, regulators are moving to address the potential impact of financial products on retail consumers.In a discussion paper titled "Product Intervention", the UK Financial Services Authority chairman, Lord Adair Turner, stated: "[The paper] proposes a quite new and more intrusive approach to the regulation of retail financial services, aiming to ensure that potential consumer detriment problems are identified and offset at an early stage."Similar moves are also afoot in Australia. In its submission to the federal parliamentary inquiry into the collapse of Trio Capital, the Australian Securities and Investments Commission flags its own awareness of the need to go beyond traditional regulation of retail products.Also, through his role with the International Organisation of Securities Commissions, the chairman of ASIC, Greg Medcraft, has been following the Belgian experiment with interest and a degree of admiration.And JB Global has not escaped attention either. In July, ASIC imposed licence conditions on JB Global after finding "cases of inappropriate advice, failure to adequately investigate clients' situations and inadequate consideration of the characteristics and risks of the structured products".It also found (surprise, surprise) some of JB Global's marketing material "may have been misleading, by accentuating the potential benefits of the investment without balancing those benefits against the risks".Perhaps Justin Beeton, and other floggers of complex structured products to retail investors, should be nervous in Australia as well.