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Some of the biggest IFAs in the UK have been warning investors for years about the risks associated with structured products but only now is the issue coming to a head.

After three years of heavy stockmarket falls, many index-linked bonds are set to bring big losses for investors.

Despite this, more firms are entering the structured product market because demand shows no sign of abating, with investors lured by the promise of double-digit income.

Hargreaves Lansdown head of research Mark Dampier says: “I am amazed that these things are still selling. Some of the bonds that have come out over the past two or three years have been awful. Some just have not made the risks clear at all.”

The true extent of the risks is now becoming apparent. Products linked to the FTSE 100 have fallen steeply, with the index down by 25 per cent in the last year alone.

Other indices have fallen even further. AIG Life&#39s Nasdaq 100-linked stockmarket income bond 4 is an example of what some investors can expect. The bond is due to mature in March next year and the index needs to rise by 59 per cent to return to its original level.

One of the worst performers is Canada Life&#39s high-income bond 3, which requires the Nasdaq to grow by 168 per cent by this April to match its starting level. Unless it does, investors will lose most of their capital.

There are dozens of other bonds which require their indices to rocket.

According to the FSA, around 250,000 people have put around £5bn into index-linked bonds since the early 1990s.

The regulator&#39s figures show that just 12 per cent of bonds were sold with advice. The majority – 68 per cent – were execution-only, with the remaining 20 per cent from high-street banks. Buying without advice has cost many investors dear.

Chartwell Investment Management director Patrick Connolly says: “Unless investors can prove that a product was presented misleadingly, there is little they can do. They have to sit tight and hope that stockmarkets recover.”

Banks with life company subsidiaries sold some of the worst-performing products and may face investigation on possible misselling by the FSA.

Lloyds Bank sold Scottish Widows bonds and some of the products are set to lose large amounts of capital. Widows accounted for around 20 per cent of the market -selling between £800m and £1bn of bonds.

The FSA, which admits it is highly concerned by the situation, confirms it is the banks which are being scrutinised. Spokesman Rob McIvor says: “This is not another &#39nasty IFAs sell bad products&#39 story but there may well be a misselling case with the high-street banks. It could be that there is a need for enforcement action.”

The regulator has issued a warning to consumers about the risks that income bonds can pose to capital and is consulting with providers on plans to include its bond factsheet with direct mailings.

But the FSA is facing the oft-repeated allegation that it only acts after the horse has bolted.

A senior industry source says: “The FSA has been very slow off the mark. What has it been doing all this time? It has had years to look at these things but has only decided to act now.”

McIvor says the FSA&#39s hands have been tied as most bonds are yet to mature and points out that in 1999 it publicly stressed that investors should be clear about what level of risk they are willing to accept.

Figures from structured retailproducts.com show that bond sales rose by 15 per cent last year, with 68 providers selling 312 different products.

The bond sales boom could soon be a thing of the past. Some companies admit that the adverse publicity that structured products will bring this year will hit their balance sheets, although few believe it is justified.

Nvesta director Graham Devile says: “I do not think that providers are culpable. The vast majority of the product literature made the risks clear but people only look at what they want to see. When income is taken into account, overall returns are often not as bad as they seem.”

But Devile does question the downward gearing on certain products – often tripling capital loss – and concedes that some investors did not realise the risks they were taking. But he contends that when many bonds were designed, stockmarkets were rising, creating a risk-friendly environment.

It echoes the argument used by some split-cap managers who say: “How were we to know there would be a bear market?” But the fact remains that many investors will be left empty-handed.

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