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FSA bond probe pointing at IFAs

The FSA is asking life companies to volunteer information about past sales of structured products because it fears a “fallout” when the indexlinked bonds mature.

It has sent a letter asking insurers to help it prepare for problems that may arise from policies maturing this year and reassuring them that any direct impact could be minimal as “most bonds were sold by IFAs”.

Some IFAs are believed to have already had exploratory FSA visits.

The letter, which is thought to have been sent to all companies which have sold structured products over the past few years, says: “The issue of exotic bonds will rise in prominence over the coming months as tranches come up to maturity. The FSA wants to be prepared for any possible fallout. The impact on insurance firms may be limited as anecdotal evidence suggests most bonds were sold by IFAs.”

The FSA is believed to fear many bonds will fail to return capital as market instability has caused them to fall below thresholds which guarantee the full investment will be paid.

Some bonds have exacerbated this problem by having downward gearing, which ensures that when guaranteed thresholds are breached, each subsequent fall in the market multiplies investors&#39 loss of capital by up to three times.

Hargreaves Lansdown investment manager Ben Yearsley says: “There have been a lot of very poor products launched over the past few years that sold because they used the words guaranteed and protected. But they were always stretching credibility to be marketed in that way.”

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