Repair for fixed interest product marketing

Financial institutions offering fixed interest products, and advisers who recommend them, need to do a better job of communicating the true nature of the products and the risks the investor faces.

The Financial Ombudsman Service yesterday issued an information sheet outlining some of the issues that have arisen in the large number of disputes over fixed interest investments over the past couple of years.

It said the term fixed interest had been wrongly applied to products that did not pay a fixed rate of interest and which put capital at risk.

In many cases the risk of capital loss had not been communicated effectively, nor had the fact that such products were usually illiquid.

Many investors did not know that if the issuer of the fixed interest investment went into liquidation, the investor would rank as an unsecured creditor.

In the case of Basis Capital Yield Fund, which was marketed as a fixed interest product despite the variable nature of the income payments, the risky nature of its exposures and its high level of gearing, it was common for advisers to categorise it as a defensive asset and to make portfolio allocations on a generic "fixed interest" basis without reference to the nature of the product. There was widespread failure to monitor performance.

The ombudsman's view is that a recommendation to invest in a fixed interest product is unreasonable if an investor was not told about the potential for capital loss, if the recommendation was to put 100 per cent of investment capital into a single product and if the adviser relied solely on information produced by the product provider.