Brendan Burgess
Founder
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The Nature of a Tracker Bond
In the experience of this office, most of these products are in fact largely backed by financial derivatives. As the Authority points out, these instruments are extremely sophisticated. The downfall of Barings Bank has in fact been blamed on the fact that none of the Board, because of their age over 50, understood the nature of financial derivatives and thus were not aware of what was happening to the assets of their Bank.
It is not difficult to imagine that most of the elderly ustomers who form a large part of the market for these Bonds do not understand financial derivatives.
The Authority should consider whether or not the training given to the staff of the institution who sell these products is sufficient to ensure that such staff themselves in fact understand the exact nature of financial derivatives, because if they do not, it is difficult to see how they can explain the nature of the investment to the purchaser.
In the past, some of these Bonds have in fact produced nil returns for the investors, despite all the talk about protection etc. Close examination of the Bond reveals that if the Index to which the Bond is linked falls by more than a certain percent, then the investor will receive a nil return. That fact should be clearly stated, rather than being buried in the middle of verbiage. Again the question of large print and red ink should be considered. By way of illustration, at least one Complainant to this office asked that whilst he accepted that the market had fallen by 50%, all he was looking for was
his 45%. In fact the Bond contained in the small print a statement that “in the event of such a fall, the return to the investor would be nil”.
There is one further issue which does not appear to be raised in the Consultation Paper. This issue is that the design of many of these Trackers Bonds appears to fly in the face of the standard investment advice that stock market based investments should be held for a minimum of 5/7 years so that when periods of negative growth are encountered, the investor will have the opportunity for the market to recover and restore growth before the value of the said investment crystallizes. Tracker Bonds which have a strict investment period of less than this minimum recommended term and which do not permit encashment prior to the agreed maturity
date appear to this office to have a fundamental flaw in that their design runs completely contrary to this perceived wisdom. As this office has frequently seen during periods of stock market unrest, this type of Tracker Bond exposes the investor to very significant losses which are not likely to be recovered during the life of the Bond.
I think the Ombudsman's comments show the uncomfortably close relationship he has has with the banks (who fund his office).
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