Structured product claims are misleading, says Which? Money
People looking to invest their money in products which claim to offer a ‘capital guarantee' or ‘100% capital protection’ should tread carefully, as they can often be riskier than they appear, says Which? Money.
[UKPRwire, Thu Jun 25 2009] In the first of its new series on financial products to beware of, the consumer champion (http://www.which.co.uk/money ) has warned that ‘structured products’* - a type of investment package backed by banks or their affiliates – are not always as safe as they may seem, and can be confusing, complex and costly.
> Some structured products promise to "guarantee" investors' money or offer "100% capital protection", but at the same time they provide contradictory information warning investors of the risks if the product provider, or counter party providing the capital protection, goes bust**. Which? Money (http://www.which.co.uk/money ) found great variation in how well the risks were explained.
> Most structured products have a fixed end date at which point your investment returns will be calculated. This means investors do not have the option of waiting for markets to recover if the investment has not performed as they hoped.
> The providers take charges into account when setting the terms of the product, which can make it difficult for people to know what they’re paying. Some providers disclose fees but others don’t.
> The returns advertised are not guaranteed, and people don’t receive the dividends that they would if they invested in the stock market directly***.
> Unlike other investments, many of these products are not covered by the Financial Services Compensation Scheme (FSCS)****.
> Some products limit the return to a proportion of the growth in the index.
James Daley, editor, Which? Money, says:
“When stock markets are falling and banks are going bust, the offer of a 'guarantee' on your savings or investments can be very appealing, but guaranteed investments are not always what they appear to be.
“Although not all protected investments are bad news, phrases such as 'capital guarantee' and '100% protection' are bandied around far too often, and don't stand up to scrutiny. We'd advise people to beware of products which make such a bold claim - unless they're backed by the government.”
- Ends -
Notes to editors
Which? is the leading independent consumer champion in the UK, providing impartial, expert information on thousands of products and services to help make individuals as powerful as the organisations they have to deal with in their daily lives. To find out more go to www.which.co.uk.
The full article ‘Structured products: Not as safe as they sound’ appears in the July 2009 issue of Which? Money magazine. For further information, the full article, a copy of the magazine or an interview, please contact Helen Lacey.
For more information visit http://www.which.co.uk/money
* There is a huge range of structured products available and sales of these products are rising.
This may be because a product that appears to offer a possibility of higher returns than normal savings, while still protecting people’s capital, seems attractive.
** In September 2008, Lehman Brothers, the U.S investment bank, collapsed. Around 6,000 people who had a ‘structured product’, a type of investment package backed by the bank, were left with nothing. Which? Money is concerned about investors who have lost money as a result of Lehman Brothers collapse. The Financial Services Authority and Financial Ombudsman Service have announced that they will review the sale and marketing of the products backed by the bank but there is no information on how long this could take. Which? Money wants to see this investigation completed quickly.
*** On a five-year product, for example, people could miss out on more than 20% of the total return they would get if they invested directly.
**** Even those that do have FSCS protection are only covered up to a maximum of £50,000, yet these products tend to be targeted at consumers who want to invest much larger sums.
