The with-profits bond has taken its fair share of criticism but negative publicity for the product stepped up a notch recently after Bradford & Bingley was hit with a fine for widespread misselling both of with-profits and precipice bonds.B&B was hit with a fine of £650,000 and has had to set aside £6m to be paid in compensation to 6,800 clients but is it the products which caused the problem or B&B’s mishandling?The Abacus consultancy director David Ferguson believes there are deep-seated problems with with-profits bonds. He says: “This is a horrendous product. It has always been pretty horrendous but it became increasingly horrendous in the late 1990s. I do not think the product works and I would not be at all surprised if other companies experience similar fines.” But it appears the regulator is more concerned with B&B’s handling of with-profits bonds than with the product. During the period under investigation – January 2001 to December 2002 – B&B was the biggest IFA in the UK. The FSA says it took action because B&B did not make suitable recommendations to customers, did not maintain adequate records for sales and did not have in place adequate systems and controls to prevent and ultimately address the failures. It reveals that B&B’s sales process included a risk pyramid used to classify the risk profile of products into three broad categories (cautious, balanced and adventurous) but failed to specify a cat-egory for customers who did not want to take any risk with their capital. This meant they were categorised as cautious, in common with customers who were prepared to take some risk with their capital, and so some people were invested in with-profits bonds when they were not appropriate. The FSA says B&B’s misselling was made more serious because it was warned on a number of occasions from 1998 onward that there were significant issues with the quality of its customer records but failed to act. Hargreaves Lansdown head of pensions research Tom McPhail believes the failure to keep adequate records of advice is widespread across the industry. He says: “The standards that the FSA is applying when reviewing the record-keeping of firms are considerably higher than the standards app-lied by commercial organisations. As a result, firms are being fined.” FSA director of enforcement Andrew Procter says: “This is a very serious case of misselling which was made worse by the fact that Bradford & Bingley had prior warning of the specific concerns about its record-keeping. However, the firm failed to pay sufficient attention to these warnings and take adequate action, which put thousands of its customers at risk of financial loss.” McPhail believes there has been a misalignment across the industry between what a with-profits bond is capable of delivering and what was sold to consumers. He says: “A lot of with-profits bond investors were under the impression that their capital would not go down in value. They were not fully aware of the risks involved. If the stockmarket goes down, they are insulated to some extent but reality will eventually kick in.” Ferguson believes there are big issues with the way the product has been promoted across the market. He says providers and distributors did not understand the risk of the pro- duct and therefore some misrepresented it to consumers. He says: “People thought they could just jump out of a deposit account into a with-profits bond as the next best thing, when this is obviously not the case.” But Prudential, which is one of the few providers still to offer a with-profits bond, is adamant there is still a place in the market for the product as long as it is matched to the right investor. Investment and savings director Hugh McKee says: “With-profits bonds allow medium-term investors to invest in a range of different assets, which they could not afford to do on their own. There are strong with-profits funds out there – the Pru fund rose by 27 per cent over the last five years compared with a 13 per cent drop in the stockmarket – but the product needs to be matched to the right customer.” Since 2000, with-profits bonds have seen reduced bonuses and the application of market value adjusters which mean returns have been significantly reduced. Couple this with the fact that expectations across the market point to further rate cuts when bonus declarations are made towards the end of this month and it is perhaps not surprising that IFAs are starting to steer well clear of the area. But will it be IFAs or direct salesforces taking the brunt of criticism as investors start to realise their investment is not working out as they hoped?Syndaxi Financial Planning director Robert Reid predicts that banks and building societies’ direct salesforces will be hardest hit by misselling of with-profits bonds, with IFAs less likely to be affected if they had recommended the product as part of an overall portfolio. He says: “The direct salesforces are more likely to be hit by the regulator for mass selling of with-profits bonds.” But Prudential claims the product is still viable as long as investors’ expectations are managed. McKee points out that returns are now going to be in single digits given the low-inflation environment and this is a big issue for providers to get across to clients. On the other hand, Hargreaves Lansdown has not sold with-profits bonds for three years and McPhail believes there are better alternatives to the product and to with-profits as a whole.