"Earn 5% a year even in a falling market"

[Duke of Marmalade]

My understanding is that national regulators have the power to ban products. Binary options were banned for retail investors a few years ago. If the excellent analysis that Colm and Brian was brought to their attention, why didn’t they act?

Interesting info Z. I know that some want this product banned. But I think I am with @AJAM that these kick-out products are maybe okay for a small minority of investors provided they know the risks they are taking. The real problem that was brought to the CBI's attention was the gross misrepresentation of the chances of significant capital loss. BCP presented this as zero chances out of 1,939 backtests all taken daily recursively in a 7 year period of the longest bull market in history. Woods and Fagan calculated from their models that the chances of an average 70% loss of capital was 15% or c.300 times in proper "clinical" tests, far from zero. Backtesting of these products is banned by the FCA but the CBI see no problem with them.

 

[Duke of Marmalade]

How can they be "okay for a small number of investors"?

The only people to profit from these are the providers - everyone else is worse off

Don't get me wrong, these products would not be for me. And the misrepresentation is a scandalous reflection of the ineptitude of our consumer protection guardians.
But you are wrong that these cannot be a win/win situation. In fact the whole basis of the retail investment industry is that it can be win/win. In other words that there is enough return on investments to feed provider, distributor and customer.
"The Currency" has produced Fagan/Woods calculations and these indicate 14.6% chance of losing 70% of your investment, 4.7% chance of getting your money back and 80.7% chance of getting 5% return per year for anything between 3 and 10 years, let's say 5 years. So that's an overall expectation of 80.7% x 25% - 14.6% x 70% = c. 10% which is more than on deposit or in state savings.
But to avoid any thoughts that I am defending the product it is outrageous that BCP suggest that there has been no downside on these products in 1,939 tests - that makes it look like a no brainer to punters hungry for yield.

These are not like gambling which is clearly a zero sum game with the punters losing on average.

 

[Colm Fagan]

An update to AAM readers: BCP Target Coupon 3 closes for new applications today. Brian Woods and I have done a lot of work on this product. It's even worse for investors than we imagined - and we're still not sure we've got to the bottom of it. Based on what we know for sure, we reckon that the odds that investors will lose more than half their money are shorter than 4-1 against, much shorter than for any of the horses in tomorrow's Grand National. The "decrement index", an invention we discovered for the first time when researching a previous version of this product, deducts over 6% a year from total returns at current market levels. Yet the brochure still shows 2,261 "successful" back-tests, all giving the investor 5% a year and their money back after 3 or 4 years.