High income products

The regulator first issued an alert in December 1999, urging consumers to think seriously about the level of risk they were willing to accept before investing in high income bonds. Todays warning has been prompted by concerns that lower investment returns on more traditional products might lead investors with a more conservative attitude to risk into higher risk opportunities.

Christine Farnish, Director, Consumer Division at the FSA said:

High income products offer impressive headline rates of return, but consumers must understand that higher returns inevitably mean higher risk.

Recently, investment returns have been falling and we are, of course, in a low inflation and low interest rate environment the Bank of England base rate is just 5%. Its important that consumers understand that low inflation inevitably means lower nominal returns. The only way to get higher returns is to take greater risks.

Consumers must read all the relevant documents carefully and make sure they fully understand how their product works and the terms and conditions attached. If they are in any doubt they should ask for clarification from their financial adviser or the firm in question.

Further advice on high income products is available from the FSA website www.fsa.gov.uk/consumer

Notes for editors

1. In April 2001 the FSA published an Occasional Paper on the impact of low inflation. Among its conclusions was that while consumers need to adjust their expectations in the light of low inflation, financial firms also have a key role in ensuring that those expectations are realistic. The Authority is paying increased attention to monitoring misleading claims by the financial services industry, especially where high nominal returns are promised or projected, and is developing guidance on the way past performance figures should and should not be used in advertising and promotion.

2. Personal Investment Authority Regulatory Update 85, issued in March 2001, reminded independent practitioners and product providers advising on derivative-linked investment products of their obligations to assess fully the risk profile of the investor before making the sale. It also reminded firms that they should ensure that any promotional material provides a fair and balanced picture of the investment and that the risks are clearly explained.

3. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the protection of consumers; and fighting financial crime.

4. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.