Structured product providers go under

The Financial Services Authority said on Wednesday that two providers of structured products that were backed by Lehman Brothers bonds have gone into administration.

NDF Administration and Defined Returns Limited, which marketed structured products to retail investors, were forced into administration after concerns were raised that their marketing literature did not adequately explain the risks to investors.

Structured products usually offer a return of the original sum invested at a certain date, plus a return linked to an underlying index. Most offer a full or partial guarantee that all the capital invested will be returned when the product matures. But these guarantees are often backed up by zero coupon bonds from other banks – such as Lehman Brothers.

Lehman-backed structured products were sold to 5,600 retail investors in the UK, representing total potential losses of £110m ($177m) after Lehman went into administration last year, leaving investors unable to access their money.

NDFA and DRL opted to go into administration rather than face possible payouts to customers who had lost money. Grant Thornton has been appointed as the administrator for both the companies.

The move will affect 3,700 investors who will now be eligible to apply to the Financial Services Compensation Scheme.

It is the first move in a clamp down on the market after the FSA confirmed last month that it had found “serious issues” with structured product providers and would be taking action against groups.

The FSA began an inquiry into the products after the Financial Ombudsman alerted it in May to an unusually high level of complaints about Lehman-backed structured products, raising fears investors had not understood the risks of the products they had bought.

The ombudsman said last month that complaints about Lehman-backed structured products had nearly doubled since May.

The total value of retail structured products in the UK is more than £38bn, according to structuredretailproducts.com. The FSA is expected to report further later this month.