April is the cruellest month, wrote TS Eliot in The Wasteland. It will certainly be a difficult time for thousands of savers who sank their savings into a generation of stockmarket-linked bonds with tempting headline rates of return.
Four such products, now called precipice bonds by our friends at the FSA, reach maturity next month. Barring a last-minute rally of spectacular strength, capital losses are pretty much a foregone conclusion on the quartet of bonds and Peps from NDF,GE Life and Canada Life.
My “favourite” is the Canada Life high-income bond 3. Return of the investor's capital is linked to the performance of the Nasdaq 100, the technology-heavy American stock index that was all the rage in 2000.
Since the bond's start, this benchmark of the American high-tech industry has slipped by a mere 78 per cent. Considerately, Canada Life built a 20 per cent cushion into the product, meaning that savers could see the index lose a fifth of its value and still be confident of getting back their capital. Alas, this product has a rather nasty sting in the tail.
Once the 20 per cent protection limit is breached, Canada Life ratchets up the losses. For every additional 1 percentage point fall, investors forfeit 3.33 percentage points of their original stake. As the market stands, they face wipe out – and I am not talking about the lunchtime quiz show hosted by Bob Monkhouse.
At least the savers got an annual income of almost 10 per cent, you might say. Now here is a question – will those investors have had to pay income tax on the distribution? Talk about rubbing salt in the wound. If so, then higherrate taxpayers will be left with around a quarter of their original pot of money.
No wonder the FSA is taking such a keen interest in precipice bonds. Just imagine the sackloads of complaints that will hit the regulator's doormat over the coming months. The number of savers involved and the extent of the losses could make the splitcapital investment trust debacle look like a sideshow in the financial circus.
Last week, a member of the FSA's politburo estimated that about 250,000 savers had pumped £5bn into high-income bonds. Michael Foot, a bigwig at the regulator, told a conference of bankers that many of the buyers did not have a clue about what they were buying.
So far, the long arm of the law has reached only so far as LloydsTSB. The bank is in discussion with the FSA after branch tellers – sorry, I mean personal advisers – shifted a truckload of Scottish Widows bonds linked to a basket of stocks.
All the constituents are in the red. Many other precipice bonds have been bought off the page. But IFAs have also been recommending them to clients. You do not need me to tell you what grief lies in store if your customer happens to be in one of the many bombedout bonds.
Precipice bonds have been an easy sell. They promised a bewitching combination – headline rates that were more than double the level of interest on a building society deposit account and “protection” of the original investment.
Sadly, as it turns out, in too many cases, the protection turned out to be as effective as condom with a hole in it.
As with zero-dividend preference shares, a simple sales message masks a horrendous level of complexity.
Even the actual terms of some products are unclear. Although advertised as three, four or five-year bonds, it is typical for savers to be required to tie up their money for weeks or even months longer. This effectively reduced the level of return.
Some providers are also less than forthright about the mechanics of the product, particularly the final date on which the index level is measured. At least Canada Life had the decency to pick a single day. Others take the average, or even the lowest, close of an index over a month.
A number even choose the lowest intra-day level of the benchmark during a 30-day period. Such complexities, which have usually been dreamt up by a young salesman at an investment bank, are difficult for even the financially literate to fathom so what hope the consumer?
Again, I marvel at the willingness of the public to buy something they do not understand. But in the current climate, this is shaping up to be another misselling scandal.
Richard Miles is deputy personal finance editor at The Times