£58bn THE GAMBLE

Once again, cautious savers are being lured to invest in fiendishly complicated — and risky — products that almost no one understands. Have banks learned nothing?

CAUTIOUS savers are being lured into gambling half-a-billion pounds every month on risky and complicated stock market investments promising returns of up to 10.5 pc.

More than £1.3 billion was poured into complex investments, which were sold by High Street banks, building societies and financial advisers in the first two months of the year.

These investments often sport solid sounding names such as Fixed Term Capital Secure Investment or Capital Protected Fund, and promise returns linked to any rise in the stock market.

They are increasingly being sold to cautious savers disappointed by the low interest rates offered on regular High Street accounts.

The attraction is that unlike a normal investment, the original capital is not at risk if the stock market falls.

However, if the investment fails to hit its target, you usually don’t get any returns. In some cases, you can start to lose money. And only a few of these types of investments are protected by the financial services’ safety net if the bank goes bust. More than £53 billion is tied up in these types of investment, which are called structured products. If recent average industry growth continues, it could reach an estimated £58 billion.

‘Savers who use a financial adviser will need to take extra care to make sure they don’t end up being persuaded to buy one of these products when they absolutely don’t need it,’ says Justin Modray, of financial advice website Can did money.

The investments earn salesmen handsome commission. They can typically make £ 3,000 on each £100,000 invested.

Last November, the City watchdog Financial Services Authority voiced its concern at the sales boom. It warns ‘a lack of robustness can lead to mis-selling’.

The FSA has flagged them up as a concern in a key product review to watch, and wants companies to ‘stress test’ them before sale. ‘ The surging popularity of these products is worrying,’ says Patrick Connolly, of the finance advice firm AWD Chase de Vere Wealth Management.

‘Given low interest rates and robust inflation, it’s such an easy sell for sales staff and advisers because they look so attractive.

‘ But they can be fiendishly complex with underlying levels of risk, they don’t benefit from share dividends and they make it difficult to get to your money.’ With savings rates so low and stock markets so volatile, banks such as Barclays and RBS are falling over themselves to sell structured products.

You can save from as little as £500, and they offer the security of some or all of your money back — and the prospect of bigger gains if a gamble pays off.

These structured products are fiendishly complicated. They use complex investments called derivatives to try to give a guaranteed

‘ Salesmen don’t know what they are selling to people who don’t

’ know what they are buying

return linked to a stock market, usually the FTSE, after a certain period of time. But they are not invested in shares. Rather they are a series of bets on stockmarket performance.

There two types of structured products: structured deposits where your money is as safe as in a savings account up to the compensation limit; and structured capital at-risk products.

In the latter, money is often not held by the bank that sells the product. Instead, it is put with a separate third-party company.

Until 2008, it was thought there was never any danger of these companies going bust. But thousands of savers who held structured investments lost money when giant U.S. investment bank Lehman Brothers went bust that year. Many never realised their money was tied up with the bank.

And it happened again in 2009 when Keydata, which sold products through branches of Norwich & Peterborough BS, collapsed. Many of these savers never got their money back.

By comparison, with a regular savings account, money is held on deposit by the bank or building society. If the organisation goes bust, savers can claim up to £85,000 from the Financial Services Compensation Scheme (FSCS).

‘As a rule, these products are complicated and lack transparency — and it’s nearly impossible to work out the charges behind them,’ says Danny Cox, head of advice at independent financial adviser Hargreaves Lansdown. More than 200 structured products have been launched this year — with two in three being the type where your money is not protected.

An example is the Legal & General Early Bonus Plan 5. It offers a tantalising annual bonus of 10.5 pc every year for six years.

But on every anniversary, if the FTSE 100 is above the level it was when you first invested, the account will close — and you will get back only your money plus any bonuses you have taken to date.

If the FTSE is down slightly, you make no extra money, but you don’t lose anything. However, if the FTSE drops by more than 50 pc, you start losing money in line with the fall in the index.

Latest figures from the Financial Ombudsman Service show the rise in the number of complaints about structured products. In the 12 months to March 31, 2011, there were 550 complaints to the ombudsman about structured products — double the number of the previous 12 months.

And the percentage of cases found in favour of the consumer has rocketed. In 2010, the ombudsman found in favour of banks in roughly half of all cases. But last year, the ombudsman upheld 96 pc of cases for consumers.

For the questions to ask before buying a structured product, go to thisismoney.co.uk/structured.

s.dunn@dailymail.co.uk