FSA starts inquiry into unit-linked bonds and pensions

The Financial Services Authority (FSA) has launched an investigation into the unit-linked bond and pensions market, over concerns that its higher and less transparent charges, in comparison with other investment products, are putting consumers' money at risk.

The Financial Services Authority (FSA) has launched an investigation into the unit-linked bond and pensions market, over concerns that its higher and less transparent charges, in comparison with other investment products, are putting consumers' money at risk.

Unit-linked products, which have soared in popularity over the past few years as with-profits savings products have fallen out of favour, have tended to deliver much lower returns than mutual funds, even those that invest in similar underlying assets.

For those life funds that offer the choice of investing in funds managed by companies other than themselves, there is often an enormous differential in return. Fidelity's special situations fund, for example, has returned 43 per cent over the past three years. However, the same fund, held within an insurance "wrapper" from Sterling Assurance, has delivered just 31 per cent.

The differential in return is accounted for by high charges and taxes payable by investors in life funds.

"The FSA are doing a fact-find into this," Leonie Edwards, a spokesman for the Association of British Insurers, told New Model Adviser, a specialist magazine. "They have told us that they want to find out more about unit-linked life funds and they want to contact life companies."

The FSA would not confirm or deny whether it was investigating the market, saying only: "There are a lot of things we get on and do, and on the whole it helps if it is not in the public domain."

Tom McPhail, the head of pensions research for Hargreaves Lansdown, the Bristol-based financial advisers, said: "The FSA is certainly tireless in its pursuit of what it perceives to be fair play on behalf of consumers. If it perceives there is an information imbalance, it wouldn't surprise me to see them take action."

Mark Battersby, the editor of New Model Adviser, said: "The FSA is keeping very quiet about this, but there are plenty of top people in the asset management industry who want a full-scale investigation into this. Even they can't understand why there is such divergence between the performance of their funds as they sell them, and when repackaged and sold by the life companies."