Financial market shake-up in Spain triggers changes in retail structured product wrappers

Fiscal and regulatory reforms announced by the new Spanish government have led market participants to rethink wrappers and product maturities, with growth and fund-linked products likely to benefit.

A fresh round of Spanish reforms aimed at completing the restructuring of the country’s banking system has introduced a two-year temporary tax hike that increases the tax rate for profits on investment products, prompting retail issuers to delay structured product maturities and coupons.

“The aim of these recent reforms is to make the financial sector safer and ensure banks can finance themselves and raise capital in the international markets,” says Salvador Ruiz Bachs, partner at Allen & Overy in Madrid. “The tax increase of 7% is planned for the next two years and has led to certain issues, such as tax planning with respect to capital gains, and now people are beginning to think about investments longer than two years so that they are taxed at a lower rate.”

Some of BBVA’s counterparties have started issuing products in which returns and coupons are paid from the second year onwards rather than on an annual basis, says Juan Pablo Jimeno, head of global structured solutions at BBVA in Madrid. “This is affecting our market to an extent, as it means that the level of tax for structured products’ coupons has also increased. Delaying the coupon can help,” he says.

The tax increase has also sparked a shift from income products offering coupons towards growth and participation products that can avoid being hit by the tax hike.

“The tax issue is pushing [investors] towards growth products because the provision affects products that are giving customers a fixed rate,” says Rodrigo de Sebastián, head of retail structured products at Santander in Madrid. “But if you structure a product that gives customers 100% of the upside on an index, you are not defining what the return will be and only know it at maturity, so these types of products are not affected by the new provision.”

The shift in the types of structured products being offered to retail investors has also been driven by the increased contribution banks must make to the Bank of Spain’s guarantee deposit fund, a scheme put in place to guarantee the payment of deposits by banks in case of insolvency or fraud.

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