If its guaranteed, protected or secure make sure you read the small print

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One of the results of low interest rates is to drive people into riskier investments that have the potential to pay out a far better return. Even better are investments that claim not to be risky and still pay that far better return.

In a recent review the Financial Services Authority (FSA) has concluded that some firms are marketing investment products describing them as “guaranteed”, “protected” or “secure” when in reality they are quite simply not.

These terms tend to be used when promoting structured products. We were warned about these products in the article Searching for a better return by John Kay back in January this year. John pointed out that there were two types of risk associated with these products. The first that the provider can’t pay out, an example of this occurred in 2008 with the collapse of Lehman Brothers. Thousands of investors lost their money, many of whom had no idea that Lehman’s was the Bank ultimately behind the investment.

Then other risk is that the investment does not generate the potential returns. Since most of these products are ultimately a bet on market performance, who is most likely to be right? You or the team of highly trained financial analysts with far superior access to information that set up the product in the first place.

Changing the dictionary and ignoring the past

The FSA’s report states that “We have reviewed this market and concluded that some firms promote these products without any clear and adequate justification for the descriptions used. We believe that this could be implicitly misleading and could lead to consumers misunderstanding what is actually offered to them.”

The proposed response from the FSA however is to simply issue new guidance on the use of such terms. There is no mention of taking any action regarding consumers who could have already been misled. Or is the plan to wait for the products to collapse around their ears before any action is taken?

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