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To: maceng2 who wrote (442)	9/27/2003 6:27:16 AM
From: maceng2	Respond to of 1417

Risky bond costs Lloyds TSB £100m FSA fines bank and orders it to pay compensation to 22,500 customers. Xan Rice reports timesonline.co.uk INVESTORS who were wrongly advised to buy high-income bonds by Lloyds TSB in 2000 and 2001 will share £98 million in compensation. The Financial Services Authority (FSA) has ruled that the bank must make good the losses of 22,500 people who were sold the Scottish Widows Extra Income & Growth Plan (EIGP) through its branch network. These so-called precipice bonds, which were linked to the performance of 30 shares, including the likes of Marconi, have since plunged in value. Lloyds TSB, which bought Scottish Widows in 2000, sold 51,000 of the bonds between October 2000 and July 2001, even as the stock market was falling. Customers were telephoned by staff to encourage them to move their money from cash into the EIGP, even if they had limited funds and no experience of investing in equity-related products. The FSA ruled that bank staff, who were put under huge pressure to meet sales targets, had not acted with due care, and fined the bank £1.9 million. Although Lloyds TSB has been punished, it was only one of a number of companies that had sold precipice bonds in the past few years. Here we explain why it was singled out, how compensation figures were calculated and what it means to people who bought precipice bonds from other companies. Why was Lloyds TSB targeted by the regulator? Most high-income bonds were sold directly by firms to investors who responded to advertisements. Many people also bought them through independent financial advisers. But Lloyds TSB sold 51,000 EIGPs from its own branches, a process that often involved cold-calling and high-pressure sales tactics. The FSA has not ordered compensation to be paid because the product was poor (although it was certainly high-risk), but because of the method of selling. How did the Extra Income & Growth Plan work? Until the EIGP hit the market, most bonds were linked to the return on a particular index, such as the Eurostoxx or the FTSE 100. Ian Lowes, of Lowes Financial Management, which assesses risk in high- income bonds, says that the EIGP was set up differently in an effort to achieve a return of 10 per cent at a time when interest rates were falling. Investors were given the option of receiving either 10.5 per cent interest or capital growth of 33 per cent over the three- year term. But by tying the return to 30 stocks, although they were blue chip companies (including Lloyds TSB itself), there was not only the potential for greater return, but also for higher volatility. Mr Lowes says: “When we analysed the bond at the time of issue, we found it significantly more volatile than an investment in the Nasdaq 100 index of technology shares.” With an index-backed investment, a share such as Marconi would simply have disappeared from the index when it started to perform badly, so the effect for investors was minimal. But with the EIGP, investors are still paying the price for the company’s failure. Which customers will receive compensation and how will it be calculated? The 22,500 customers chosen to receive compensation are divided into two categories. About 16,500 people who had never purchased equity-based products before and invested more than 20 per cent of their financial assets in the bonds, and a further 6,000 investors who had previously bought an equity-based product but had invested more than 35 per cent of their spare cash. All these people will have their original investments refunded, less any income or surrender values that have already been received. They will also be paid compound interest of about 5 per cent on their investments. Lloyds TSB has written to all the people who bought bonds through its branches, telling them whether they are entitled to compensation and, if so, how much they are being offered. They will have 60 days in which to accept the bank’s offer. Those customers who do not receive an offer of compensation will have to submit their claims direct to the Financial Ombudsman Service if they feel that mis-selling occurred in their case. Call the Lloyds TSB information line on 0800 3284761. What if I bought an EIGP through an independent financial adviser? You need to complain to the IFA, and then take the case to the Financial Ombudsman Service if necessary. What if I bought my bond from another company? The FSA is still investigating whether mis-selling occurred elsewhere. Complaints must be directed to the firm that sold the investment, or the IFA involved. The Ombudsman is the last resort