Drop 'wicked' bonds

By DAILY MAIL REPORTER
Updated:

 

PRECIPICE bonds are 'inherently wicked' and should never have been sold - apart from in a few rare instances.

That's the personal opinion of the president of the Institute of Actuaries, Jeremy Goford. Actuaries are some of Britain's sharpest mathematicians, who understand the intricacies of even the most complicated products.

Mr Goford's tough stance backs up Money Mail's view that precipice bonds should certainly not have been sold to anyone without carefully tailored advice fully explaining the real risks involved.

Thousands of readers have sent Money Mail details of their failed precipice bond investments. These bonds - which were sold mainly to investors needing income - were linked to the performance of one or more stock market index.

But a 1% fall in shares could trigger a much greater fall in the value of these bonds, and most investors are now sitting on serious losses.

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• ONE of the many victims of precipice bonds is Bridget Coughlan (pictured), from Kenley, Surrey, who invested £12,000 of her redundancy package in NDF Extra Income & Growth 2. When the plan matured in May, Mrs Coughlan had lost two-thirds of her money - her £12,000 lump sum had been whittled down to just £4,000.

When she was made redundant from Nestle, Mrs Coughlan went to see financial adviser Berry, Birch & Noble (BBN) and subsequently gave them £12,000 to invest for her.

In its letter outlining her options, BBN says Mrs Coughlan wanted 'to take a lower to medium risk investment approach (risk category level 2/3)'and went on to recommend that she should look at NDF Extra Income & Growth Plan 2.

It described the details of the plan, pointing out that if the final Eurostoxx 50 index finished more than 25% down on its initial level, investors would lose 2% for every 1% over this threshold.

But in bold print, the recommendation letter adds: 'Most importantly, the promised returns under the plan are guaranteed by Abbey National Treasury Services.' In fact, Abbey had nothing to do with the design of the bond. It simply provided the financial mechanics needed to provide the index tracking. 'This is the worst investment I've had in my whole life.There is

absolutely no way I can make up this loss,' says Mrs Coughlan. 'Although I do understand about money, I don't understand investments, which is why I went for advice.' Mrs Coughlan has put her complaint in writing to BBN, which says it will not comment until the investigation is complete.

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Many claim that the risk of losing all or most of their money was not properly explained to them - either by their adviser or by the mailshots they received.

Speaking exclusively to Money Mail, Mr Goford says: 'I fundamentally believe that the benefits of a product should meet needs. But apart from in a few obscure cases, there are no needs that are satisfied by these bonds. As a product, they are inherently wicked and should be killed off.'

And because precipice bonds have been generally sold to less sophisticated investors, the real risk is never explained. In many cases, investors withdrew money from building societies to invest in these bonds, which would suggest they were typically risk-averse and did not want to speculate.

Mr Goford would like the rates offered on precipice bonds to show realistically the potential risk of capital loss.

'If the estimated capital loss was in big letters next to the return, then it would kill off precipice bonds for ever,' he adds.

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