A summary and later news are here.

July 2003

Howard Davies suggests that some of these 'precipice bonds' were inappropriately sold. Thousands of people bought them for the high income, under the impression that they were safe, but their capital value dropped when stock markets fell. One firm said:

There are a lot of chancers after compensation out there. It's easy to whinge when you've lost money. The warnings were in the literature. The trouble is that people sometimes only read what they want to read.

Another firm, which sold millions of pounds of stock market linked bonds, suggests that it is in danger of becoming a bigger issue that it really is. One bond in the literature of the David Aaron Partnership was described as medium to low risk, scoring an impressive 8 out of 10 for basic rate taxpayers. Those who bought the plan in 2000 lost 57% of their initial capital when the plan matured in May 2003. The firm added: Assessing relative risk is subjective. It depends on conditions when the plan was launched.

The FSA is expected to fine Lloyds TSB soon for the way it sold these 'precipice bonds'. Others are also being investigated.

April

Investors in six high income bonds due to mature in the next 3 months are likely to lose their money unless stock markets shoot up, according to new research. Most of the bonds were sold through direct marketing or advertising, rather than by financial advisers. The FSA has fined one form for misleading advertising (see below), but they say "if people were made aware of the risk, there is nothing we can do".

Did the advertising stick to the rules? That is one question. But if advertising within the rules led to thousands of people buying an unsuitable product, the rules themselves must be inadequate. The FSA sets the rules to protect consumers. If consumer protection has failed in the case of high income bonds, the FSA has failed.

February

In the last ten months the Ombudsman has received 1000 complaints about mis-sold high income bonds, compared to 362 in the previous year. As the Ombudsman says, what is guaranteed is the income, but not the capital.

January

The Ombudsman has ruled that literature describing the Scottish Widows Extra Income and Growth plan was defective, because it did not state that the risks were significant.

50,000 Lloyds TSB customers could be affected. Hundreds have already complained to the Ombudsman that the risk to their capital was not fully explained.

With guaranteed income bonds, the income will be paid as agreed, but if the stock market does not rise enough, the bond holder may not get all their capital back.

Lloyds TSB says the product literature has 15 warnings that capital may not be returned in full, but the Ombudsman ruled the warnings did not state that the risk was significant.

This product would not have been suitable for a risk averse customer. Lloyds TSB say, "where we believe the Extra Income and Growth Plan sold was not appropriate, we are compensating the investor."

The Financial Services Authority has highlighted guaranteed income bonds as an area of possible concern and is also investigating how these products were sold. This could lead to a fine.