Structured Notes Explained: Benefits, Risks and Cross-Border Considerations for Expat Investors

To assist in leveraging the potentially enhanced returns of structured notes while minimising their risks, this article will outline what structured notes are, how they work, what types exist, and the key considerations for internationally mobile or expat investors, you should make before investing in them.

What Is a Structured Note?

A structured note is a hybrid financial instrument that incorporates fixed-income securities and derivative contracts. They are unsecured debt obligations issued by banks or financial institutions, with returns linked to the performance of one or a group of underlying assets, such as:

• Stocks.
• Commodities.
• Equity indices.
• Currencies.

A structured note’s proceeds are typically divided into two purposes:

1. The majority of the proceeds are allocated to the issuer’s debt or funding instrument, which may or may not provide principal protection depending on the structure.
2. The remainder is invested in an embedded derivative to provide growth potential.

Due to its multi-component constitution, structured notes provide customisable payoffs. They may be designed to cap gains, provide periodic coupons, or return principal under specified conditions.

This tailored approach makes structured notes an attractive option for investors seeking to diversify beyond traditional assets. However, it also raises notable security risks.

Specifically, structured notes are not insured by institutions such as the FDIC or programs like the UK’s Financial Services Compensation Scheme (FSCS).

This is because structured notes are treated as unsecured debt of the issuing bank rather than deposits.

Since investors do not own the underlying assets directly, returns depend on the issuer honouring the contract, making issuer creditworthiness a central risk factor.

How Do Structured Notes Work?

Structured notes define payoffs in advance over a fixed term, ranging from three months to several years. Their terms specify conditions tied to underlying assets, and the specific mechanism primarily depends on the design.

The “worst-of” or barrier design is a prevalent model. In this structure, the note may track several indices or stocks with two potential outcomes:

1. If the worst-performing underlier finishes above a preset barrier at maturity, the investor receives their full principal back, alongside any gains (if the note offers participation in upside performance).
2. If the barrier is breached downward, the principal repayment may be reduced in proportion to the underperformance or, in some structures, result in the investor taking the full downside exposure of the worst-performing asset.

However, contrary to common misconceptions, most structured notes do not include inherent principal protection. The so-called bond-like portion represents the issuer’s funding component rather than a safeguard for capital.

Only notes explicitly structured as principal-protected (PPNs or certain structured deposits) offer any level of capital preservation, and even then, protection applies only if the note is held to maturity and the issuer remains solvent. The derivative leg determines any additional return.

Any principal protection a note pay offer primarily depends on the issuer’s solvency, underscoring the aforementioned risk. In case of a default by the financial institution that issued the note, your investment may be jeopardised.

What Are the Types of Structured Notes?

The most widespread types of structured notes are:

1. Principal-protected notes (PPNs)
2. Income notes
3. Growth notes
4. Absolute notes
5. Digital (binary) notes

Principal-Protected Notes (PPNs)

PPNs are structured notes designed to return the complete (or a high proportion of) the original investment at maturity. This protection applies only if the note is held to maturity and the issuer remains solvent. Regardless of the underlying assets’ performance, the principal remains shielded from downturns under the terms of the protection structure.

Such security is achieved by allocating the majority of the investor’s capital to a low-risk bond or deposit-like instrument, with the remainder utilised to purchase upside options.

In practice, a PPN may offer a 100% return of capital, along with a share of equity gains, if the note is held to term. PPNs are appealing to risk-averse investors and those without significant experience with structured notes.

However, these guarantees are offset by specific disadvantages, most notably:

• Capped upsides
• Higher embedded costs
• Call risks (the possibility of the issuer redeeming or calling your note before maturity)

Although PPNs minimise market risk, the credit risk remains. If the issuer defaults, principal protection does not apply.

Conditional or barrier-style protection features found in some capital-at-risk notes should not be confused with true principal protection.

Despite such risks, PPNs are worth considering if you are a conservative investor who does not wish to expose assets to significant market risks.

Income Notes

Income notes are structured to deliver regular coupons that may be utilised as an ongoing income stream. They allocate a portion of the investment to a funding component rather than a traditional bond, and utilise the remainder to fund options or swaps on an underlying asset.

The primary feature of income notes is the ability to produce fixed (or predictable) income payments on set dates. Coupons are typically paid only if the underlying asset remains above a specified barrier or meets predefined conditions.

The mechanics generally include:

• Headline coupons often appear higher than market rates because the investor accepts capital-at-risk exposure linked to the underlying asset.
• If the underlying breaches the coupon barrier, payments may be reduced, suspended, or not paid at all.
• If the assets perform well, you will most likely receive the base coupon without an additional upside.

Income notes are best suited for investors seeking steady yields who are willing to accept the associated risks.

Losses can occur if the predetermined barriers are breached, and upside is typically limited or absent altogether because most income notes monetise upside potential to fund coupon payments.

Growth Notes

Growth notes forego fixed coupon income in favour of leveraged exposure to asset growth. They are designed to maximise participation in upside market movements while providing either limited, conditional, or no capital protection depending on the structure.

These notes pay out an amount tied to the percentage gain of the underlying asset at maturity, where the payout may exceed 100%. For instance, a growth note may return 1.5 times the gain (up to a specific cap) of the S&P 500 over that period.

If the assets within a note appreciate, you realise enhanced gains. Conversely, the note may return only a fraction of the original capital or, if barriers are breached, may mirror the full downside of the underlying asset, which can exceed the risk of owning the assets directly due to the structured leverage.

Due to extended market exposure, growth notes are suitable for investors with a bullish outlook who seek equity-like returns while still maintaining a defined or conditional degree of protection (where included in the terms).

Absolute Notes

Sometimes referred to as Dual Direction notes, absolute notes are designed to provide positive returns within predefined ranges of market movement, while limiting exposure to downside risk up to a specified buffer or protection level.

Their structure allows an investor to participate in a capped fraction of any negative moves (often up to a protection limit), while the positive payment is based on the absolute value of the return of the underlying asset so long as the underlying remains within the note’s permitted range.

For instance, if an asset’s price falls 5%, an absolute return note might still pay a positive amount, though often at a capped rate. However, if the underlying breaches the downside protection level, the investor may be exposed to full or significant losses.

Absolute notes aim to provide positive returns regardless of market direction, but only within the boundaries specified by the payoff structure. As a result, they are best suited for investors in uncertain or volatile markets who wish to generate a return while accepting that protection is conditional and not guaranteed in all scenarios.

Digital (Binary) Notes

Digital notes offer a single, typically fixed payment at maturity if predefined conditions are met (i.e., the underlying asset reaches or exceeds a specified performance level or barrier). They are similar to income notes, although they pay their entire coupon in one lump sum at the end of the term.

Due to the single payment, digital notes typically come at a shorter term than income notes. By structuring payment as a “step-up” or digital payoff, investors can achieve high returns for a bullish outcome, but they typically receive nothing if the conditions fail and may also face capital loss if the note includes a downside barrier or capital-at-risk feature.

Given that failing to trigger entails losing a significant portion of the anticipated return and, in many structures, exposing the investor to downside risk linked to the underlying, digital notes are suitable for investors willing to bet on a specific outcome.

Although they are simpler than some alternatives, the “all or nothing” mechanism and potential capital-at-risk exposure may expose you to significant risks.

What Are the Main Benefits of Investing in Structured Notes?

The most compelling arguments in favour of investing in structured notes include:

• Enhanced return potential: Structured notes may provide higher gains than traditional fixed-income investments. Their utilisation of derivatives enables enhanced or leveraged participation in upside movements, and certain income-focused structures can deliver attractive coupons even in sideways markets. However, any outperformance depends on market conditions and the specific payoff structure, and is not guaranteed.
• Tailored risk-return profiles: Notes may be customised to match an investor’s market views and risk tolerance. For instance, you may select a note with defined or conditional capital protection if your objective is downside hedging. Conversely, an income note with frequent coupons may be suitable if you seek consistent returns. The flexibility of notes also extends to the choice of underlyings, as notes can link to foreign equity indices, commodities, or bespoke baskets.
• Built-in downside mitigation: Structured notes can provide capital preservation features, such as full or partial protection when held to maturity, or buffers that limit losses to a fixed percentage. These protections apply only where explicitly included in the terms and do not protect against issuer default.
• Access to diverse assets and strategies: Structured notes enable individual investors to gain exposure to sophisticated or hard-to-access asset classes and strategies (foreign markets, commodities, derivative spreads, etc.). They combine underlyings into a single instrument, broadening diversification beyond traditional stocks or bonds.

What Are the Main Risks Associated with Structured Notes?

Regardless of their appealing features and mechanisms, structured notes expose investors to various risks, most notably:

1. Inadequate structuring.
2. Credit risk.
3. Liquidity risk.
4. Excessive fees.
5. Currency and jurisdictional risks (for expat investors).

Inadequate Structuring

Structured notes are inherently complex, combining multiple terms and financial instruments into a single solution.

Many investors may find it difficult to understand how barriers, buffers, autocall features, and derivative payoffs interact, particularly when marketed across borders with differing regulatory disclosure standards.

A typical individual investor may find it challenging to understand features such as:

• Customised payout formulas.
• Barriers and buffers.
• Downside and upside caps.
• Autocall triggers and conditional coupon mechanisms.

Due to the complexity of structured notes, there is a considerable risk of misunderstanding the actual risks and costs, which may lead to haphazard or ill-informed structuring decisions.

The UK’s Financial Conduct Authority and other major regulators (e.g., ESMA, MAS, SFC) explicitly warn that structured notes should only be purchased by investors who fully understand the associated risks.

If you are not among them, professional guidance is highly recommended. This is especially relevant for expat investors accessing products in jurisdictions where disclosure standards may differ from the UK or EU.

Our financial advisors at Titan Wealth International provide expert cross-border advice to help clients make informed investment decisions.

Credit Risk

A structured note is effectively a loan to the issuing bank or financial institution. If the issuer defaults or becomes insolvent, there is no guarantee of payment. Regardless of how well the underliers perform, you may lose all your investments.

This possibility is not only theoretical. Several documented cases of such losses demonstrate the reality of this risk, with the collapse of Lehman Brothers in September 2008 being among the most infamous. The financial crisis led to over $18.6 billion in structured note investments becoming effectively worthless.

What further exacerbates this problem is the understatement of credit risks in many financial institutions’ sales materials. They often focus on the appealing features to somewhat conceal the risks, which makes thorough due diligence critical to selecting a reliable issuer.

Credit ratings, issuer balance-sheet strength, and the jurisdiction of issuance are particularly important for globally mobile investors who may not be protected by domestic compensation schemes.

Liquidity Risk

Once you purchase a structured note, your investment will most likely remain illiquid until maturity. Most notes have no active secondary market, and pricing is controlled by the issuer’s internal valuation models.

It can be a significant risk to buy options with a longer term due to changes that might prompt you to exit the investment, such as:

• Shifts in market conditions
• New life events or circumstances
• More favourable opportunities

Although it is technically possible to exit a structured note before the term expires, doing so typically involves selling the note back to the issuer. Such sales are conducted at the issuer’s discretion and terms, and they often expose you to considerable penalties.

Early sale values may be substantially below the note’s theoretical value due to wide bid–offer spreads and hedging unwind costs.

Excessive Fees

Structured notes tend to have higher and more opaque fees than traditional investments. While mutual funds have explicit management fees, structured notes incorporate costs into their pricing and terms.

It may lead to an inaccurate initial cost assessment and result in poorly calculated returns. The high commissions on new issues that some advisory firms charge contribute to this problem. For instance, promised coupons or index-linked gains may already have commissions deducted, reducing the net returns.

Due to the potential lack of transparency regarding fees, it is essential to insist on full disclosure or use independent platforms to compare net-of-fee performance.

Expat investors should be particularly cautious when purchasing notes in offshore markets, where commission caps, suitability rules, and disclosure standards may be less stringent than in the UK or EU.

Which Cross-Border Considerations Should Expats Make Before Investing in Structured Notes?

If you wish to invest in structured notes abroad, you must consider the regulatory suitability of different products across jurisdictions. While structured notes are typically restricted to sophisticated investors in the UK or EU, certain jurisdictions, such as the UAE, may have more lenient rules.

An expat in such jurisdictions may be offered a note that is not authorised for domestic retail.

Organisations such as the FCA and SEC require distributors to verify that clients understand the risks, while certain jurisdictions may not have such oversight. As a result, expat investors with limited knowledge may invest in products that exceed their understanding and oversight ability.

Regulatory standards, disclosure rules, and investor protections can vary substantially between jurisdictions, making cross-border due diligence essential.

Tax Treatment of Structured Notes for HNW Expat Investors

Understanding the tax treatment of structured notes is essential for expat investors, as returns may be categorised differently depending on the jurisdiction in which you live, the structure of the note, and your long-term tax residence.

Structured notes do not share a universal tax classification, instead each country applies its own rules on whether returns are taxed as income, capital gains, or annual accruals. This can materially affect net performance and may create cross-border reporting obligations.

Your tax treatment may also change if you relocate during the note’s term.

United Kingdom Tax Treatment for UK Expats (Non-Residents)

If you are a UK national living abroad and no longer UK-tax resident, the UK will generally tax you only where income or gains have a UK source.

Structured notes issued offshore or linked to non-UK assets normally do not create UK-source returns. In most cases, your country of residence will determine how coupons, gains, or annual accruals are taxed.

Several circumstances may still create UK implications:

1. UK-Source Income
   If a structured note pays UK-source interest or is issued by a UK entity, UK withholding tax may apply unless reduced or eliminated by a double-tax treaty.
2. UK Custody or Platform Arrangements
   Holding investments through a UK platform can create reporting or operational considerations. This does not usually result in UK taxation but may affect withholding or compliance requirements.
3. Temporary Non-Residence Rules
   Under the UK’s Temporary Non-Residence rules, certain gains or income realised while abroad may become taxable if you return to UK tax residency within five tax years. This may be relevant where structured notes create a capital gain, particularly if they were acquired before leaving the UK.
4. Taxation in Your Country of Residence
   Your main tax exposure arises in your country of residence, which may classify structured note returns as:
   • Interest income
   • Capital gains
   • Annual accrual-based income
   • Deemed income on offshore holdings

Double-tax treaties may mitigate foreign withholding but do not remove domestic tax liabilities.

Because structured notes vary widely in design and cross-border tax outcomes depend heavily on residence status, expat investors should seek advice tailored to their current and potential future jurisdictions.

US Tax Treatment (Including US Expats)

US citizens and Green Card holders are taxed on their worldwide income, regardless of where they live. Many structured notes issued globally fall under the IRS rules for Contingent Payment Debt Instruments (CPDIs).

Under this regime:

• Investors must accrue taxable income annually, even if no cash coupon is received (“phantom income”).
• Gains at maturity are often taxed as ordinary interest, not capital gains.
• Notes referencing US equities may attract withholding on dividend-equivalent payments under Section 871(m) for non-US issuers.

For US expats, local tax advantages in their country of residence rarely offset US obligations, meaning professional tax guidance is strongly advised before investing.

Tax-Neutral or Low-Tax Jurisdictions (UAE, Singapore, Hong Kong)

While jurisdictions such as the UAE, Singapore, and Hong Kong often impose no domestic tax on investment income or capital gains, expats must remember that tax neutrality does not override obligations to:

• Home-country tax authorities (e.g., US, UK, Australia)
• Double tax treaty requirements
• Automatic exchange of information regimes (CRS/FATCA)

Residents of these regions must therefore consider whether returns from structured notes will be taxable elsewhere and whether any withholding applies at source.

Considerations for Mobile Expats and Former UK Non-Doms

Since April 2025, the UK no longer offers the non-dom/remittance-basis regime. UK residents, including former non-doms, are taxed on worldwide income and gains.

The Foreign Income & Gains (FIG) regime offers relief for the first four years of UK residence for qualifying new arrivals but does not replicate the former non-dom system.

• Mobile expats may experience changes in tax treatment when relocating, including:
• Shifting from a low-tax or territorial system to worldwide taxation
• Different reporting and withholding rules
• Reclassification of structured-note income depending on local legislation

Professional cross-border financial advice is strongly recommended when changing tax residency during the life of a structured note.

Regulatory Classification & Suitability Rules in Key Expat Markets

Investing in structured notes as an expat requires careful consideration of the regulatory environment in both your country of residence and your product’s issuing jurisdiction.

Structured notes are classified as complex investments in most major financial centres, which means access, investor protections, and advisory requirements vary significantly from one jurisdiction to another.

Understanding these differences is essential for ensuring that the product you are offered is appropriate for your risk tolerance, financial literacy, and regulatory status.

United Kingdom & European Union (MiFID II Framework)

In the UK and EU, structured notes are generally categorised as complex products under MiFID II. This classification imposes several requirements:

• Appropriateness assessments: Firms must test whether a retail client understands the risks before allowing them to proceed.
• Suitability requirements: If a structured note is recommended as part of advice, firms must demonstrate that the product is suitable for the client’s objectives and risk profile.
• PRIIPs KID requirement: A Key Information Document must be provided, outlining risks, costs, and performance scenarios in a standardised format.

Structured notes are typically not restricted to professionals only, but distribution to retail clients involves heightened scrutiny and governance controls.

United Arab Emirates (Onshore SCA vs DIFC / ADGM Free Zones)

The UAE has two regulatory spheres that operate differently:

1. Onshore (Securities & Commodities Authority – SCA): Some structured notes may be available to retail clients but only through authorised firms, and standards of disclosure vary compared to UK/EU rules.
2. DIFC and ADGM (Free Zones supervised by DFSA / FSRA): Structured notes are typically treated as complex products, with many issuances restricted to Professional Clients based on wealth, income, or experience thresholds. Retail access is significantly more limited than in onshore markets.

Expats should ensure that any adviser promoting structured notes is licensed by the relevant regulator in their jurisdiction.

Singapore (MAS) and Hong Kong (SFC)

Both Singapore and Hong Kong classify many structured notes as Specified Investment Products (SIPs), requiring enhanced checks:

• Mandatory Customer Knowledge Assessments (Singapore) or Suitability Assessments (Hong Kong).
• Additional risk disclosure obligations due to the complexity and derivative exposure of structured notes.
• Certain leveraged or non-protected structures may only be available to Accredited Investors or Professional Investors.

Implications for Expat Investors

Product availability can differ widely. Notes available in the UAE free zones may not be permissible for retail distribution in the UK or EU.

Investor protections depend on the jurisdiction. Offshore or cross-border offerings may not carry the same governance standards, complaint mechanisms, or disclosure obligations you would receive in your home market.

Adviser licensing is critical. Many expats inadvertently receive investment advice from firms not authorised to advise them in their country of residence. This can affect recourse, suitability requirements, and regulatory protection.

For these reasons, expat investors should verify the regulatory status of both the product and the adviser, and ensure the structured note aligns with the standards applicable in their jurisdiction.

Currency & FX Risk for Expat Investors

For expats who earn, save, and invest across multiple currencies, foreign-exchange (FX) movements can significantly affect structured note returns. Many notes involve more than one currency exposure, meaning the payoff you ultimately receive may differ from the performance of the underlying asset.

Multi-Layer FX Exposure

A structured note may expose you to FX risk at several levels:

• Issuer currency – the currency in which the note is issued or repaid.
• Underlying currency – the currency in which the reference asset (e.g., index, stock basket) is priced.
• Investor currency – the currency in which you spend or hold wealth.

These layers can combine to create outcomes that diverge from expectations, particularly in volatile markets.

Hedged vs Unhedged Notes

Some notes offer FX hedging, which reduces currency risk but usually lowers potential returns. Many expat-distributed notes are unhedged, meaning FX movements can either enhance or erode returns.

Why FX Matters

• A strengthening home currency can reduce returns, even when the underlying performs well.
• A weakening home currency can boost returns upon conversion.
• Over multi-year terms, FX movements can outweigh asset performance entirely.

What Expat Investors Should Consider

• Match investments to your spending currency where possible.
• Understand whether the note is hedged or unhedged.
• Assess how FX volatility might affect coupon income or principal repayment.

For globally mobile investors, analysing currency exposure is essential before committing to any structured note.

Why Does Structured Note Investing Typically Require Professional Advice?

Consulting a financial expert before investing in structured notes is crucial because these products involve complex payoff structures, derivative components, and varying levels of conditional protection that can be difficult to assess without specialist knowledge.

A qualified adviser can provide clear guidance on important decisions, such as:

• The type of note you should invest in.
• How long you should hold the note.
• Which features to look for in a structured note.
• How the note’s risks, fees, and issuer creditworthiness align with your objectives.
• Whether the product is suitable under the regulatory framework of your country of residence.

Most investors (including many knowledgeable ones) can benefit immensely from such guidance due to the numerous complexities of structured notes.

For expat investors, additional tax, currency, and cross-border regulatory considerations further increase the importance of professional support.

If you do not have experience with structured products, you should not purchase them before gaining complete clarity on the financial, regulatory, and tax implications of your investments.

Professional advice helps ensure that the structured note is appropriate for your risk tolerance, financial circumstances, and jurisdictional requirements.