Consumers and advisors should be wary of any investment product offering the sort of high returns com...
A report published today by the FSA says such high return products can mean unsuitable levels of risk that overly jeopardise consumers' capital.
The FSA bases its findings around the UK's low rate of inflation, which during the 1990s fell to rates last seen in the 1960s. Furthermore it is likely to remain around the Government's target rate of 2.5% for the foreseeable future.
The FSA argues that savers need to understand that low inflation means lower nominal returns - by the end of the 1970s savers could earn 15% in a national savings account but with inflation at 18% in 1980, that return was eaten. Today's low inflation, a rate of 4.5%, means investors are better off in real terms.
Research suggests investors are under the wrong impression that inflation will average around 4% in the future both higher than the target rate and the current rate.
Howard Davies, chairman of the FSA said today: "A number of today's regulatory problems have their roots in the failure to adjust to lower inflation. Endowment mortgages were sold effectively on the assumption that inflation would eat away the real value of the debt and that high nominal returns would be generated on the endowment policy. Guaranteed annuities were sold on the basis that the guaranteed rate was a floor below which nominal rates were unlikely to fall. Both assumptions have been invalidated causing problems for consumers and firms."
Davies added:" It is vital that today's consumers are not again misled into thinking that high nominal returns are available in low risk investments. Sadly, there are those in the financial industry who still like to claim - or imply - that they can deliver the high nominal returns of the past even in a 2.5% world. They are doing the public a disservice."
The FSA's report indicates that the FSA will concentrate on monitoring misleading claims by the financial services industry, especially where high nominal returns are promised or projected. It will also provide guidance on the way past performance figures should, and should not, be used in advertising and promotion.
The Occasional Paper "Low inflation: Implications for the FSA" is available on www.fsa.gov.uk
Some passive fees reduced by 50%
Creates platform business with £125bn AUA
'Annuities reinvented' paper
As US dollar strengthens