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Banks face FSA probe as Bond investors lose cash

Major banks such as Lloyds TSB look set to bear the brunt of FSA action over structured products after the regulator admitted that high-street retailers rather than IFAs may be guilty of misselling.

The FSA is investigating sales of index-linked bonds amid fears that thousands of products maturing this year will fail to return capital to investors. The regulator believes that many investors may have been unaware that stockmarket falls could leave them empty-handed.

It had been widely assumed that IFAs would be the targets of the regulator&#39s probe after it sent a letter to product providers last year asserting that most bonds were sold by IFAs. But the FSA has now admitted that banks are far more likely to face enforcement action.

The biggest loser is liable to be Lloyds TSB, which sold through its branches a large number of Scottish Widows&#39 ailing extra income & growth bonds, which account for around 20 per cent of the £5bn market.

Lloyds TSB has already been ordered by the Financial Ombudsman Service to compensate one bondholder on the basis that its literature was misleading and, with hundreds of complaints still pending, could face a huge compensation bill.

Another bank in the firing line could be HSBC, which sold a fixed-income Pep which requires the FTSE 100 to rocket 65 per cent by this April to avoid capital loss.

FSA spokesman Rob McIvor says: “This is not a nasty IFA story. There may well be misselling with the high-street companies. It could be that there is a need for enforcement action.”

Lloyds TSB spokeswoman Helen Thompson says: “We obviously work very closely with the regulator and listen to what it says. But in terms of the ombudsman, there were 15 warnings on the product literature.”

•Investment, p34

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