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ombudsman news

issue 29

July 2003

not all bonds are "investments"

guaranteed income bonds

We have received a significant number of complaints about so-called "guaranteed income bonds", which some commentators have called 'precipice bonds'.

Typically, the income is guaranteed for the life of the bond - but may be paid out of capital if the value of the shares that the bond is invested in, or the index to which the bonds are linked, falls substantially (as has happened recently). If there is a fall, the capital invested will not be returned in full.

These bonds are technically "structured products - capital at risk". They are investment products, and the normal rules about investments and investment advice apply.

guaranteed capital bonds

We are also starting to receive complaints about so-called "guaranteed capital bonds" or "equity bonds". These are a quite different product.

Typically, customers are guaranteed to get their capital back when the bond matures - but the income is based on the rise in the value of the shares that the bond is invested in, or in the index to which the bonds are linked.

If there is a fall in these values (as has happened recently) then there is no income. Although called "bonds", they are really fancy deposit accounts - technically "structured deposits - income at risk".

These fancy deposit accounts are banking products, not investment products. The same rules apply as for any deposit account. The firm is not required to complete a "fact find" or to volunteer advice - although it is liable for any advice it does give. The firm may be liable to pay compensation if it gave misleading information or negligent advice, or if it set up the account in a way that did not coincide with its customer's instructions.

In the case of both "guaranteed income bonds" and "guaranteed capital bonds", we will be looking particularly closely at complaints where a firm canvassed an existing customer (who was not looking to move their money) and persuaded them to move, on promises of a better return.

Walter Merricks, chief ombudsman

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.