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Structured Notes

Structured notes are fixed-term complex investments that track the performance of derivatives over a period of time. This article details structured notes and provides examples of how they work and the various risks for investors and expats.

Last updated 21 January 2022 at 16:30

A structured note is non-mainstream fixed term investment and is made up of two or more derivatives (normally stocks or indexes) which are then tracked over a period of 4-6 years, providing a return to the investor if specific conditions are met. At the end of the term the investor then receives all or some of their original investment back, again in accordance with the performance of the product at the end of the term.

As structured notes are complex financial products, in the UK the FCA rules state that they should only be available for sophisticated investors and are generally not available on the high street. They will typically be sold by major banks or hedge funds and be part of a larger investment portfolio.

This article looks at the key information about structured notes, explaining how some advisory firms’ mis-sell structured notes to non-sophisticated investors, specifically expats, and how to recognise the signs that you may not have been told the full information about your investment decision.

We have broken this guide to structured notes into several key sections:

The information contained in this article does not constitute financial advice and should not be used in isolation for making any financial decision. If you are unsure about any financial matters, you should always seek advice from an independent financial adviser who can walk you through all the options and provide you with unbiased guidance on your best course of action.

How structured notes work

As previously mentioned, a structured note is made up of multiple derivatives, i.e. stocks (eg. company shares) or indexes (eg. FTSE100) and will be sold as a specific product.

Normally the structured note will consist of three or four derivatives, however it may be as few as two and as many as six.

The note is a fixed term product at normally set for between four and six years. During that time, the performance of the derivatives will be regularly reviewed and if specific conditions are met the investor will receive a percentage return of their investment. However, if the conditions are met, the investor will not receive anything.

The performance of the derivatives (i.e. the stocks or indexes) will be based on the worst performing one, so the structured note will normally include at least one historically good performer and one that is expected to do well but may not have a decent historical record.

The structured note will also have a benchmark set at the beginning of the term that the worst performing derivative will have to be above when the note matures (i.e. reaches the end of the fixed term). If the worst performing derivative is above that benchmark, the investor will normally receive 100% of their investment back. However, if that derivative is below the benchmark, then the investor will only receive back a percentage of the investment.

Structured notes: an example using indexes and a £100,000 investment

Investor A is presented with a five-year structured note that is made up of four indexes:

  • FTSE 100 (UK)
  • NKY (Japan)
  • DJU (US)
  • OMX (Sweden)

The investor wants to invest £100,000 in the structured note.

Under the conditions of the structured note the performance of the note will be reviewed quarterly and a 2% pay-out to the investor will be triggered if the lowest performing index is 5% above the original mark.

The protection barrier is set at 75%. Therefore, when the structured note matures at the end of the five years fixed term, if the worst performing index is above 75% of it’s original position, the investor will receive 100% of their investment back.

In this example, if one of the indexes remains below 105% and above 75%, the investor will not receive any payments throughout the term, however they will receive £100,000 back at the end of the five years.

If, in this example, for 9 months all indexes are above 105% during the five years, the investor will receive three payments of £2,000.

If all the indexes remain above 75% at the end of the term, the investor will receive their original £100,000 back as well, meaning their total income over the five years will be £106,000.

However, at the maturity, one of the indexes is at only 60%, the investor would only receive 60% of their original investment, i.e. £60,000, irrespective of how the other three investments performed.

At any given time, the investor would be able to review the performance of the note and if they wanted to would be allowed to sell their structured note, however, they would only receive back their investment according to the rules set out when originally purchasing the structured note.

Benefits of structured notes

Performance and payments

Structured notes are superb for investors during bullish markets and periods of strong economic performance. Typically, during these periods the investor will not only get their entire investment back at maturity, they would also be highly likely to receive regular income payments throughout the fixed term as well. This makes them relatively low risk, and high reward.

Even in neutral markets, the fact that the worst performer is unlikely to drop below the lower threshold, the investor may not receive income during the fixed period, but they are still likely to get their investment back.

Even if bearish conditions, the investor is still likely to get some of their original capital back, if not all of it.

Given that if an investor were to purchase shares, while the market performance may increase any increase in investment would only be realised when the shares were sold or if dividends were paid, two factors which cannot be known or accurately predicted.


Due to the way that structured notes are offered and sold, they themselves do not come with any management charges. Therefore, even if they are purchased through an advisory firm, the advisory firm may choose not to add additional fees on top of the investment.

Problems with structured notes


Structured notes are inherently complicated. The contain multiple terms, conditions and terminology – and for this reason the FCA in the UK only recommends that they are sold to sophisticated investors who are fully aware of their investment options and completely understand their decision.


Structured notes can also be risky, especially in uncertain economic times when markets can be erratic and are then more akin to gambling than many other investment options. Therefore, even sophisticated investors will often only have around 10% of their total investment portfolio tied up in structured notes at any given time.

Considering structured notes are designed for sophisticated investors, such investments are considered more of a gamble on a stock/index that might perform better over the next six years, but hopefully won’t be worse after that time. However, if it is much worse, then the investor starts to lose. Of course, for a multimillionaire, losing £100k isn’t necessarily a major issue, but if half of your £500k pension pot is tied up, then a significant chunk of your retirement pot is at risk.

Hidden fees

If purchased as part of an investment option, an investment firm may use the fact that there are no management fees associated with a structured note to make it look like their fees are reduced. For example, if you were investing £100,000 in total and the management fees would typically be 3% per year, if half of the investment was being put into a structured note, essentially you would only be paying 3% on half of the investment (i.e. £50,000) making it look like the management fees are only 1.5% per year.

Coupled with this, structured notes that are made available through an advisory firm will often pay that advisory firm a % commission of the total investment and any payments made through the term. This commission will come out of your investment itself diminishing the amount of money you will receive. For example, if you were promised 5%, this may have originally been 6% but the additional 1% has been paid to the adviser.

What is a sophisticated investor?

This article has referred to the term “sophisticated investor” which is an investor that meets specific criteria set by the FCA and that FCA regulated firms must follow when it comes to offering financial products, such as structured notes.

A sophisticated investor is defined by the FCA as either certified or self-certified.

Certified sophisticated investors

A certified sophisticated investor is an individual that has a written certificate provided by a firm within the past 36 months confirming that he/she has been assessed by the firm and is “sufficiently knowledgeable to understand the risks associated with engaging in investment activity in non-mainstream pooled investments” and has signed “sophisticated investment statement”.

Self-certified sophisticated investors

A self-certified sophisticated investor is an individual who has declared and signed a “self-certified sophisticated investor statement” and in doing so meets two or more of the following conditions:

  • For a minimum of six months been a member of a group of angel investors
  • Has made an investment with an unlisted company within the previous 48 months
  • Has worked for 48 months in a professional capacity in the provision of financial for an SME
  • Is, or has recently been, a director of a company with a turnover of £1m or more

High net worth investors

Structured notes may also be sold to high-net worth investors which means they have signed a “high net worth investor statement” declaring that they have receive an annual income of at least £100,000 or has held net assets over £250,000 (excluding pension, primary property, mortgages, benefits of service).

In each case, the investor has declared that they understand the risks of investments and have provided evidence that they understand the nature and complexity of non-mainstream investments.

Structured notes for non-sophisticated investors

If you have followed the above information, know that you are not classed as a sophisticated investor or high-net worth investor and yet have still been offered or purchased a structured note, you may be wondering why and how this has still been allowed.

An independent financial adviser would be considered a sophisticated investor and therefore have a full understanding of the investment options available and they are allowed to promote structured notes to non-sophisticated investors, provided that they:

  • Fully explain the workings of the structured note, ensuring the investor completely understands the risks, benefits, costs and conditions associated with the investment
  • Provide supporting documents that fully detail the structured note from the bank selling the structured note
  • Clarify their fee and payment structure and how this affects/impacts any payments to the investor
  • Meet all of the regulatory requirements as set by regulatory bodies, such as the FCA, in their jurisdiction

Therefore, it is not uncommon for “normal investors” to have part of their investment portfolio tied up in a structured note, even in regulated jurisdictions like the UK. It is perfectly legal and providing the investor is fully aware of the risks involved, potentially lucrative – enabling normal investors to benefit from investments that would otherwise be unavailable.

They critical element of this is that the adviser must ensure that the investor has all the information and completely understands what they are investing in.

Structured notes and expats

Under UK law, the FCA regulates what financial advisers promote and how they sell and regulated advisory firms must be compliant.

However, outside of the UK, the FCA has little to no jurisdiction over how advisory firms operate. Over the years this has led to multiple scenarios of mis-selling different investment options, not being transparent over fees and in some cases acting fraudulently to receive excessive commissions at the detriment of the investor.

Unfortunately for expats, they are often the target of these firms and structured notes have been one investment option that has been used in such circumstances.

Firstly, as previously mentioned, the firms have deliberately used structured notes to artificially reduce their management fees and hide commission payments they are receiving from the issuing bank.

Secondly, and far more worryingly, to sell structured notes unscrupulous advisers will often extol the benefits of the structured note only (e.g. “you will definitely get your money back after the fixed term has ended”) and will not highlight the risks and complexities involved. By deliberately eliminating this information, investors have discovered at the end of the term that their worst performing index or stock was below the threshold and receive only a fraction of their original investment back.

Thirdly, advisers have risked much larger percentages of total investments in structured notes (up to 50%) due to the commissions involved, without fully explaining the risks.

How to spot structured note mis-selling danger signs

When you’re speaking to the financial adviser, if any of the following situations occur before you are asked to sign something, you should probably seek a second opinion before making a decision:

  • You were originally cold-called and were not seeking investment advice
  • The adviser has not performed a risk profile analysis and presented you with a personal report detailing all of your options
  • You have not been made aware of any risks of the investment, or it is being sold as having no downsides
  • You are not completely clear about the terminology used
  • You are not provided with an overview sheet from the issuing bank exampling all the conditions, normally including graphs, benefits, risks and suitability checker
  • You do not feel completely aware of:
    • Fees of exiting existing investments (such as pensions)
    • Custodian/platform fees
    • Fees of any underlying funds
    • You are told not to worry about the underlying funds at the point of signing an agreement and that they will be clarified once everything is signed and agreed
    • You are not sure about the market conditions and the potential risk for loss
    • Your investment in structured notes is larger than 25% of your total investment

Your options if you already have invested in structured notes

Structured notes are not necessarily a bad product, even if you have been mis-sold. However, if you have any concerns, unlike some investment options you still have choices.

The first step is to speak to an independent financial adviser that is also completely independent of your current firm or investments. They will be able to review your structured notes, including how they are performing and help identify risks you may be exposed to.

While not always possible, the adviser may be able to help you move your investment if you so wished. It may not be required but the option may be there – however this should only be done after detailed discussions and investigations as you will essentially be making a new investment.

If in doubt, request a free consultation via Experts for Expats

The advisers we work with are completely independent, meaning they are not tied to any investment plans or products. This means that they will be able to review your investments, including any structured notes and produce a report for your which also identifies your risk profile, align the options with you and provide clarity over any fees or hidden charges you may have been exposed to.

During the initial consultation, the adviser will ask several questions to help them understand more about you, build your risk profile and review the performance of your current investments. They will also be able to answer your questions and be able to give you a second (or third) opinion on any decisions yet to be made and will be able to offer advice on decisions you have already made.

To request a free consultation, enter your details using the form and we will ask one of the independent advisers in our network to contact you and arrange a time to set up your free consultation.

What expats say about our experts

The referral by Experts for Expats led me to a couple of advisers that provided exactly what I required. The adviser clarified what would be best for me as an individual with limited understanding of pension transfer implications and confirmed that I was correct in stepping away from what had been put in front of me by previous cold-callers.

Mark S. North America, Pensions