Beware of structured products – keep investing simple

Santander is back in the headlines for all the wrong reasons. Having been voted the worst bank for customer service by Which? and Moneywise in 2010/2011, it's been hit with a £1.5m fine from the Financial Services Authority (FSA). The bank told customers that certain products were covered by the Financial Services Compensation Scheme (FSCS) when they weren't. This matters: the FSCS pays out up to £85,000 if a product is covered and the provider goes bust.

The interesting thing here is that the FSA concedes that the products were not mis-sold in the sense of being unsuitable for the buyer nor did investors suffer any financial loss as a result of Santander's failings. The mistake was suggesting FCSC cover might apply when it didn't. The fact that the bank updated its product literature a year after customers started querying the level of cover cut no ice with the regulator, since the position was ambiguous at the point of sale. So what lessons can investors draw from this latest FSA move?

Santander (like other banks) persuaded its customers to put an estimated £2.7bn into 178,000 complicated "structured products" at the height of the banking crisis. The bank is perfectly entitled to market such products, provided the risks are made clear. But the fact that the bank's Guaranteed Capital Plus and Guaranteed Growth Plans (which offered varying payouts depending on how the FTSE 100 did over 3.75 and 5.5 years) didn't qualify for full FSCS protection wasn't pointed out.

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The reason why is a bit fiddly. Basically it's because the underlying stockmarket-linked structured product was a combination of a bond and a derivative issued by a Santander subsidiary company. A mis-selling or mis-management claim would potentially have stood if a customer had taken it to the Financial Ombudsman service, but not a claim with the FSCS should the issuer have gone bust.

Our conclusion? Firstly, structured products are not a good idea per se we are not fans of anything with complicated returns when something simpler will often do a better job. Besides, fees tend to be higher than on simpler products. Secondly, if any of the key terms relating to a product are not made clear, don't buy it it's that simple.