Visit LinkedIn Profile Marc Wolterink. 30 September 2013

Q&A with Carel ter Ellen

In March this year, Rabobank announced the closure of its equity derivatives division, following a review of the business which found that the business made only a limited contribution to Rabobank International’s key strategic goals of becoming the number one wholesale bank in The Netherlands, as well as the leading player in the food and agriculture industry. At the same time, the bank said that the new regulatory and compliance rules surrounding equity-linked structured products (especially when sold to private clients) raised the perception of potential reputational risk and costs, in combination with declining revenue opportunities.

But has Rabobank quit structured products altogether? SRP spoke to Carel ter Ellen (pictured), head of private investment products at Rabobank International, who explained what is happening at the bank.

Earlier this year Rabobank announced that it was closing its equity derivatives division. Can you explain exactly what the situation is?

Rabobank has decided to close its equity derivatives book and we will close the trading desk after positions have been phased out. However, within Rabobank we have seen that interest-linked products are bigger than equity derivatives products and we will continue to offer these to our clients. Besides that, the ability to offer equity-derivatives products via white-labelling has been kept open.

Rabobank has issued very few products in The Netherlands lately. What is the reason for this?

Rabobank’s private banking division currently has the mandate to introduce Rabo structures to the market. Rabobank wants to issue only products which protect the principal. It’s not easy to build these products at the moment due to the low interest rates and the requirements imposed on issuing companies. Furthermore, within Rabobank but also nationwide, the investment services are being reviewed. One of the main reasons behind this is the ban on the so called kick-back commission which will be implemented in 2014 and which will have many consequences for the investment services division.

Which Rabobank products are popular at the moment and why?

Interest-linked bonds issued by government-owned banks such as Bank Nederlandse Gemeenten (Dutch Municipal Bank, BNG) and Nederlandse Waterschapsbank (Dutch Water Board Bank, NWB) are very popular and sell well, as well as in the secondary market. The reason for this is that as a result of the credit crisis, the financial sector has lost its authority and creditworthiness and for investors it makes sense to instead invest in products related to governments. Steepeners are also in demand as they currently pay high coupons.

How do your products compare with those of your competitors?

Rabo’s products have lower costs than most of our competitor’s products — partly due to the low credit spread — and are generally more risk averse. Our clients are possibly more cautious. Rabobank is traditionally a savings bank and that is something which is reflected in our products. The Rabo  client is more focused on interest than on other underlyings.

An increasing number of investors invest via the internet. How can you involve this group in structured products?

We see a clear shift by investors to the internet and of course we want to follow the customer’s choice. Rabobank’s ceo, Piet Moerland, has also indicated that our services must focus on the internet. We are responding to this by improving the information we provide in the hope that structured products will become more accessible for do-it-yourself investors and will therefore be bought more by this group. In addition, a ban on commission is due to be introduced in The Netherlands next year. We use a saying in The Netherlands ‘unbeknown makes unloved’ which is true if you cannot fully understand the risks. The funny thing is that reaching the investors who invest via the internet still happens mostly via the ‘old media.’

You have said that arrangers of structured products should take more responsibility when it comes to provision of information. Can you explain why?

As a manufacturer and supplier of structured products, the arranger has in my opinion a number of responsibilities, especially after introducing a product. If arrangers have an eye only for an introduction — and the associated fees — then, in the long run, they will lose investors and issuers who will become disgruntled about market maintenance, the quality of the information provided and the impact on the reputation of the issuer. The arranger is, in my view, not only responsible for manufacturing a reliable product but also for providing clear, actual and relevant information during the term of the product. The arranger should be responsible for creating a market — whether at Euronext Amsterdam or not — by continuously providing a bid/offer price. Nowadays, because of the internet, that’s something which would be fairly easy to achieve and which, for the sake of decency, you may expect from the arranger. I think that the arranger should service its products and at the same time manage client expectations. Negative surprises should not come from products but instead should be the result only of disappointing market developments.

In a recent report, the Dutch regulator - Autoriteit Financiële Markten (AFM) — said that most investors have insufficient knowledge when it comes to leverage products. Does this also apply to investors in regular structured products and how can this be improved?

That depends. Investors are different and so are products. Our structured products do not have the stop-loss feature which, according to the AFM, led to investors losing money. In the past we did see products which were clearly too complex, but this type of product is rarely seen these days. We are hoping to tackle this problem by providing comprehensive, useful and honest information.

As a result of the AFM report, providers of leverage products are going to form an association of issuers which will, most likely, be open to other providers as well. Is Rabobank also going to take part?

No, not yet — and for several reasons. There is a large focus on leverage products in this association and we do not offer these. I personally feel that such an association should be set up under the umbrella of the Nederlandse Vereniging van Banken (Dutch Banking Association, NVB) plus there is the fact that there could be discrepancies between Rabobank’s views and the views which are propagated by the association. We want to see how it goes first before we join.

How do you see the role of the AFM? Are you satisfied with its functioning or does it interfere too much with the market?

I think that the AFM has a useful role. Not only are there always people who fall down on golden promises, but the financial sector does not have the ability to keep ‘dishonest parties’ away from the market. However, they can also damage the image of banks. I think that the investor should have the right to decide in which products he or she invests, and I don’t see it as a good thing when the AFM bans certain investment products — although often it is not the regulator but the banks which are reacting in that way. I once suggested to the AFM that they would catch more flies with honey than with vinegar. Encouraging positive development is, in my view, at a low ebb. The AFM could, for example, introduce an award for parties that do best.

How do you see the Dutch market for structured products developing?

That is partly dependent on interest rates. In The Netherlands, the market has changed so much that the retail investor hardly dares to take risks. Many investors focus on savings but the question is whether they realise that with the current rates they lose capital, as taxes and inflation are considerably higher than the return on their savings. You therefore have to take some risks to achieve your investment objectives. With structured products, you can pretty much sit in between the risky assets — such as equities and funds — and savings (think of principal-guaranteed products) which could take away the fear of possible risk to the investors. In addition, many investors don’t realise that structured products are often cheaper than exchange-traded funds or funds. I speak only for Rabo, of course. Once the risk appetite changes and investors realise that structures are not expensive, the market could quickly show more activity. In neighbouring countries we do see quite some activity, but consumer confidence in Germany, for example, is significantly higher.

Carel ter Ellen is head of private investment products at Rabobank International. Connect with him here .