Mis-selling warning on capital guarantee funds

The report, which details the risks the FSA sees facing the financial sector and its customers, says the costs of guarantees must be fully explained to the investor at the outset.

While the regulator recognises structured investment products have a role to play in encouraging saving, it argues that most investors are likely to have difficulty calculating their “fair value”. This complexity, it says, goes some way to explain the wide variation in charges and value-for-money offered by capital guarantee funds.

The report says: “Consumers need to scrutinise these products more closely to make sure they understand what they are really paying, or giving up, for the guarantees on offer, and also how valuable these guarantees are.”

For example, many of the most popular products are often backed by riskier assets, or offer over 100% participation in a given indices, such as the FTSE 100. However, in these cases the FSA notes the guarantees are made in nominal terms, and the investor does not usually receive the flow of dividend payments that would accrue if they held direct equities.

For example, many of the most popular products are often backed by riskier assets, or offer over 100% participation in a given indices, such as the FTSE 100. However, in these cases the FSA notes the guarantees are made in nominal terms, and the investor does not usually receive the flow of dividend payments that would accrue if they held direct equities.