Beware hazardous savings and investment products
If you’re looking to invest you’ve got a lot of choices. Some are reasonably safe, some are quite risky, and some can be hazardous.
- High-risk products
- Structured products
- Unregulated collective investment schemes
- Exchange traded products
- Traded life policy investments (death bonds)
- Targeted absolute return funds
A good rule of thumb is that if promised returns seem too good to be true, they probably are.
There’s no reason not to invest in high-risk products if they suit your financial goals and you already have a safety margin in low risk investments such as a Cash ISA.
We look at some of them in this article, and cover others in our guide on high-risk investment products.
But if a high-risk product is not suitable for your circumstances and needs, it can be dangerous.
This happens if a product is:
- Much riskier than you were led to believe it would be
- Sold without a proper explanation of the risks and/or
- Not eligible for compensation if things go wrong.
The Financial Conduct Authority (FCA) flags up particularly risky, hazardous investments and requires firms to consider their potential customer base before designing such products.
Financial advisers should not recommend such products if they are not suitable for you and we urge you not to buy these complex or risky products without getting advice first.
With structured products your money is invested in financial contracts that are designed to produce a return linked to stock market performance.
What you get out depends on a set of rules. It could be something like:
“If the FTSE 100 index goes up by at least 20% during the next three years you’ll get a 30% return. If not, you’ll just get your money back.”
If you’re nervous of investing, you might think this is a good deal.
You get the benefit of investing in the stock market (possible high returns) but without so much uncertainty, because you know exactly what the possible outcomes are.
Seems simple enough? It isn’t.
- The terms usually come with a lot of small print, and it’s very difficult to judge how likely it is that you’ll make money.
- Some structured products offer a guaranteed money back clause, some don’t – but even if yours does, you might find that the bank backing the scheme is unstable, or that if something goes wrong you have no protection.
- There’s a lot of concern that structured products have been mis-sold in the past, because financial advisers got big commissions for selling them.
Unregulated collective investment schemes
You might have heard of investing in funds. In a fund, your money is pooled with a lot of other people’s and invested by an expert fund manager.
Most funds are regulated by the FCA, which gives you a form of protection if things go wrong – but with some, called unregulated collective investment schemes (UCIS), you don’t get that protection.
Unregulated collective investment schemes might be things like hedge funds or involve more unusual types of investment, such as forestry, film production and foreign property.
- Usually they claim to offer high returns, which you should always see as a red flag. High returns always come with high risk.
- Some of these schemes are just straightforward scams. Some are genuine, but often over-promise and under-deliver, or are being sold illegally.
- Because they’re unregulated, you can’t complain to the FCA or the Financial Ombudsman Service if you think you were mis-sold the product or caught by a scam.
The FCA says:
“We have seen evidence that ordinary members of the public are being sold UCIS, with some customers being advised to invest their self-invested personal pension (SIPP) into a UCIS.
This is not recommended for most people as UCIS, by their nature, are risky products.
We have found evidence that some complicated investment opportunities are being unlawfully promoted and sold to members of the general public.”
Exchange traded products
Exchange traded products (ETPs) are ones whose value goes up and down according to the value of an index (a group of companies used to measure the growth of a market) or another measure, like the price of oil or gold.
Some ETPs are well known and straightforward but some are much more complex and they do not all offer you the same level of protection against things going wrong.
ETPs that are in the form of investment funds are called exchange traded funds (ETFs) and are regulated.
Many physically hold the shares or other investments that they aim to track and so are fairly straightforward and similar to other types of investment fund that you might consider.
However, some ETFs are complex and more risky, for example, tracking an index in artificial ways (called a synthetic investment strategy) or tracking an unusual asset, that might be hard to define and measure.
There are other types of ETP that are not set up as funds. They might be bonds or have other more complicated structures.
They are not regulated by the FCA, so you might have little or no protection.
They include exchange traded commodities (ETCs) and exchange traded notes (ETNs), and are not suitable for most people.
The FCA says:
“ETPs might not be suitable for all investors. There are other risks associated with them that include stocklending, collateral and trading an ETP.
You should ask if your ETP is exposed to these risks.”
Traded life policy investments (death bonds)
Traded life products are nicknamed ‘death bonds’ because they’re investments in the life assurance policies of, usually, US citizens.
A death bond holds the rights to the pay-outs from insurance policies when the policyholder dies – so the sooner the people die, the better your investment will do.
- Death bonds might be based on faulty strategies. The strategy a death bond follows is based on calculations about how long people will live – very difficult to estimate, due to medical advances.
- Death bonds are often mis-sold – you’ll be tempted with high returns which might not appear, and you might not be told about the risks.
- A lot of death bonds fail completely, so you could lose all of your money.
- With many of them, you won’t be protected by the FCA or Financial Ombudsman Service if something goes wrong.
The FCA says:
“We are worried that this market could grow and cause further customer losses in the future. Traded life policy investments (TLPIs) or ‘death bonds’ are complicated products generally unsuitable for the mass retail market.”
Targeted absolute return funds
If you feel you were mis-sold an investment you can complain to the Financial Ombudsman Service – but only if the investment is properly regulated by the FCA. Always make sure an investment is regulated before you invest.
Targeted absolute return funds aim to make consistently positive returns over a specified time period (say, two or three years). In other words, they suggest they can give you a reasonable return on your investment whether stock markets are rising or falling.
The trouble is, in a lot of cases, they just don’t deliver the returns that have been claimed.
- Absolute return funds use complicated financial techniques to go against the market, which can be risky and lead to losses if things don’t go as planned.
- You might think the investment offers capital protection – meaning that you get back at least as much as you put in – but you can find if you look closely, the small print says differently.
The FCA says:
“Providers will need to ensure they meet their regulatory obligations in relation to these products, for example in relation to the targeting of them and the explanation of their risks.”