Lautro acts over with-profits bonds Vivien Goldsmith

THE INVESTIGATION by Lautro, the insurance companies' regulator, into the marketing of with-profits bonds has resulted in a handful of companies being forced to write to some existing bondholders.

Lautro was concerned that people were misled about the nature of the investment. A single premium payment is made and the bond grows as bonuses are added every year alongside the regular premium with-profits policies.

But with the bonds most companies reserve the right to cut the bonuses already added if people cash in their policies at a time when the markets are depressed and the bonuses give an over-generous return compared with current market conditions.

One of the companies that is having to write to investors is Equity & Law, which is withdrawing from this market on 17 August having attracted pounds 300m through the bonds.

The companies are concerned that the funds will be vulnerable to people withdrawing in hard times, leaving long-term, with-profits endowment policyholders in effect paying the price.

Lautro has criticised the use of a picture of people riding a roller-coaster that was used in some of Equity & Law's sales literature. As a result the company is writing to around 300 investors explaining the risks involved. If the investors want to take up a complaint it will follow the normal procedure.

Duncan Kerr, chief actuary, said: 'We are in subjective territory, but we recognise that we must not distort the message.'

A year ago Sun Life wrote voluntarily to some with-profits bondholders. None decicided to complain or asked to withdraw, and some even decided to invest more money, said a Sun Life spokesman.

The firm sent Lautro 84 items of literature on with-profits bonds for the current investigation. There were minor objections on three of them. But Sun Life withdrew from the market in May after taking pounds 360m this year.

Friends Provident, which is withdrawing from the market next Friday, has been asked by Lautro to include an insert with marketing, while the Pru and Legal & General have been told their literature is acceptable.

Stephen Abbott, L&G's product development manager, said it had not been selling the bond aggressively. It had taken around pounds 30m this year.

He added: 'Our view it that it is a long-term investment, so we have suffered in marketing terms. We want the funds in a steady flow and are still in the market.'

L&G gives an undertaking that there will be no adjustment to bonuses if the bond is held to its 10th anniversary.