Sales check on equity schemes

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The Independent Online
THE TREASURY is reviewing the way guaranteed equity products - heavily marketed investments which offer a combination of stock market exposure and security - are being sold.

Regulators are concerned about advertisements that do not make it clear that there may be tax to pay or do not define clearly the scope of guarantees.

The Securities and Investments Board, the chief investment regulator, has asked the Treasury to look at the way firms are promoting these products. Lautro, the watchdog which regulates life insurance and unit trust companies, recently tightened its rules.

In an advertisement last week National & Provincial Building Society promised: 'Over 133 per cent of the stock market's performance with building society security'. But it did not say that this rate of return was before tax.

A life insurance company selling the same product would only have been allowed to promise '100 per cent of the stock market's performance'. This is because Lautro, which regulates life and unit trust companies, requires its members to quote after-tax returns.

Building societies, which are separately regulated, argue that the guaranteed schemes are based on deposit accounts and so are subject to rules governing their traditional products. They say life companies should be required to make clear that the net return on their products could alter if life company tax were to change in the Budget.

Guaranteed equity products typically promise to return the original investment intact even if the stock market falls. And they promise to increase the value of the investment in line with the stock market if its rises.

Marketing slogans for these products include 'Gain without pain' and 'Stock market investment without the risk'.

There is pressure in the City for all guaranteed equity products to be treated as investments, in which case they would be regulated by SIB or its junior bodies, which include Lautro, rather than by the Building Societies Commission.

If the Treasury decided guaranteed equity products were investments it would have far-reaching consequences for the structure of City regulation.

Lautro changed its rules after Laurentian Life launched a capital protected bond which quoted gross returns. It promised to increase investments of up to pounds 20,000 by 115 per cent of the stock market rise in a five-year period.

A spokesman for Laurentian said this was in line with prevailing market practice last year. The 115 per cent rate it promised was gross and was equivalent to 86 per cent after tax.