High income products: Make sure you understand the risks

Christine Farnish, Director of Consumer Relations at the FSA said:

" Consumers should seriously think about what risks they are willing to take with their money. High-income products can help people improve the income they get from their capital but are probably unsuitable if they are uncomfortable with the possibility of not getting their original investment back in full."

"The FSA is particularly concerned that consumers may not be aware that by investing in these products, they could be putting their capital at risk. Also, they should not be taken in by the headline income suggestions that this is fixed or protected can be confusing with the small print often revealing that this is only the intention of the investment provider. Whether or not the advertised level of income can be maintained depends on the future performance of the underlying investment or on certain conditions being met, such as a particular stock market index increasing by a given amount."

"Sales of high-income products have risen significantly in the current low inflation/low interest rate environment as consumers, including many who are either retired or about to retire, look for opportunities to raise higher income from their capital."

Products designed to produce a higher than average income include corporate bonds, funds which invest in corporate bonds, and bonds or shares linked to a particular index or indices. Some of these products are also available as an ISA (Individual Savings Accounts). Before investing in high-income products, consumers should be aware that:

• Unlike bank and building society savings accounts, the capital value of the product can fall below the original amount invested, especially if it is cashed in early. This can happen even if the product comes in the form of an ISA.

• Maximum benefits are usually only achievable after a set period, often five years.

• The headline income rate may be dependent on certain factors being met. It will not usually be guaranteed.

The FSA is currently conducting research on what consumers understand from advertisements and literature promoting high income products. The findings, expected in February 2000, will help assess the extent to which advertisements promoting these products can be deemed to be fair, clear and not misleading.

Notes for editors

1. The FSA (Financial Services Authority) is an independent body set up by government to regulate financial services and protect consumers.

2. The FSA has commissioned IFF Research Ltd to conduct a series of in-depth face to face interviews with existing and potential investors of high income products. The target market will be defined as people aged 50+ who have, or are likely to make, medium term lump sum investments of between 3,000 and 7,000. Research is required to determine whether FSA concerns are justified and to test the effectiveness of a proposed factsheet. The key questions to be addressed in the research are

   • What attracts investors to these types of products

   • How well do investors understand how these products work and the risks involved

   • Whether the advertisements and product literature are fair, clear and not misleading to investors

   • Whether these products are attracting smaller "traditional" investors who cannot afford to risk their capital or put "all their eggs in one basket"

   • Whether the proposed FSA factsheet on these products provides investors with the necessary knowledge to make more informed investment decisions and how its effectiveness can be improved

3. The FSA Consumer Helpline can answer general queries about financial products and services, tell you if a firm or adviser is authorised and help you if you have a complaint and do not know who to contact. Their number is 0845 606 1234 (charged at local rate).

4. The FSA also produces a range of user-friendly fact sheets and booklets available from our leafletline 0800 917 3311, or website (http://www.fsa.gov.uk/pubs/pibooklets.htm