Alan Steel Asset Management says the sale of corporate bond funds by tied bank advisers could create a misselling scandal.
Chairman Alan Steel, who was one of the first to spot problems at Equitable Life, believes banks are preying on savers who have seen falling interest rates decimate the income earned on cash deposit accounts. He believes tied bank advisers are failing to properly explain the risks.
He says: “Banks are dragging in clients from cash accounts and flogging them their corporate bond fund without doing a proper fact-find or clearly pointing out the risks. You can bet your bottom dollar there will be shedloads of money pouring out of bank accounts into the banks’ corporate bond funds because the bank can make a bigger margin and it is an easy sell.”
Investment expert Justin Modray estimates banks earn a margin on savings accounts of 1-2 per cent compared with up to 5 per cent on corporate bond funds and annual charges of 1 per cent.
Pension consultant Ros Altmann agrees clients may not always understand the risks. She says: “Selling corporate bond funds improves the situation for banks’ balance sheets because they can offload some of the risk on the unsuspecting public and get a higher margin. With a bank account, at least your capital is protected but a corporate bond sacrifices this security for additional income. Pensioners, in particular, may not understand their capital is at risk until it is too late.”
HBOS whistleblower Paul Moore, who raised concerns about corporate bond sales while he was the bank’s head of group regulatory risk in 2003, says the difference in margin can create a product bias. He says: “If the banks can make more margin by having money in their corporate bond funds than on deposit, the chances are they are going to want to do it.”
An HBOS spokesman says: “Advice for products that invest in our corporate bond fund is only provided by tied regulated advisers who follow a clear and transparent advice process.”