# IFSRA warns over sexed-up trackers!



## Brendan Burgess (23 Nov 2003)

Great news! IFSRA has issued its first ever warning about products issued by an Irish financial institution. 

Eoghan Williams covers it in today's Indo



> THE Irish Financial Services Regulatory Authority (IFSRA) has issued a health warning about sexed-up financial products which encourage customers to borrow to invest.
> 
> Mary O'Dea, the consumer director of IFSRA, says it is wise counsel not to gamble with borrowed cash. "The old adage that you should not invest money that you cannot afford to lose is good advice," she said.
> 
> ...



This really is great news. Irish Life's claims that IFSRA had raised no objections to its product were very disturbing. I got the  distinct impression that the staff in IFSRA just did not understand the new breed of trackers. I still cannot understand how they don't strike down the Quadruple Growth Bond which never, ever gives quadruple growth. 

Where does this leave Irish Life and ACC? Must they now communicate this warning to their customers? Should they now allow customers to withdraw from the products? Should they just cancel the products?

Where does it leave the Authorised Advisors and other intermediaries who have been selling the products for huge commissions? They must be open to claims of mis-selling if they don't bring IFSRA's warning to the attention of customers?

Brendan


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## AA (23 Nov 2003)

*Mixed message*

BB,  I would like to think Mary O'Dea's message was as forthright as you say.  I am not so sure.  Can we see anywhere what she actually said?

Disturbingly, in the Tribune she is reported as saying "geared trackers could be suitable for wealthy people provided they understood the risks".

This completely takes the sting out of her warning.  Indeed I can see these words being actually part of the promotional literature for the next geared trackers!

The people who have fallen for these like to think of themselves as "sophisticated/wealthy" and people who understand and are prepared to take risks.  This "warning" is in danger of actually heightening the appeal of geared trackers to this constituency.

What Mary O'Dea should have said unequivocably is that *"GEARED TRACKERS ARE SUITABLE FOR NO-ONE, BUT NO-ONE"*


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## Brendan Burgess (24 Nov 2003)

*Re: Mixed message*

_Press Release from IFSRA Saturday 22 November 2003_

Consumer Director Highlights Dangers of Borrowing to Invest

‘Geared Trackers’ need careful assessment
The Consumer Director of the Irish Financial Services Regulatory Authority today (Saturday 22 November) highlighted the dangers of borrowing to invest in equity markets. Mary O’Dea warned consumers to consider very carefully the potential for loss associated with loans offered to facilitate buying tracker bonds. 

"The old adage that you should not invest money that you cannot afford to lose is good advice", said Mary. She urged consumers to assess very carefully loans to buy tracker bond products - ‘geared trackers’ that offer an opportunity to borrow funds to invest in equity markets. "These are risky products and consumers should ensure they fully understand what is involved, including all costs, charges and issues around how the tracker product is structured."

She highlighted the two main risks associated with this type of product as:

the risk of loss because of a slide in share prices in cases where the product does not carry a 100 per cent capital guarantee and, 
the risk that the costs involved will be more than any return earned on the tracker. The costs involved include the interest on the funds borrowed and the charges levied by the product provider as well as any penalties imposed for early termination. 
She pointed out that the ‘exit tax’ on any gain - currently 23 per cent - as well as the interest cost and the charges, must be taken into account in assessing the possible risk or reward involved in such investments. There is also the risk that interest rates may rise over the period of the loan, increasing the cost of the funds borrowed. An added complication is that these tracker products usually cap or limit the gain the consumer could achieve from any rises in share prices on equity markets.

While some trackers offer a capital guarantee, consumers should be aware that this may not cover the entire amount of the capital invested and may only be available where the tracker is held to maturity. Consumers should establish at the outset the level of cover provided by any guarantee. "Even in a best case scenario where there is a 100 per cent guarantee on the capital amount borrowed, there is no guarantee that the tracker will earn enough to cover the associated costs", said Mary. 

Geared trackers may be more suited to high net worth consumers, who may benefit from these products as part of a portfolio approach to investment. The consumer should be able to assess whether the costs, risks and benefits involved are suitable to their particular circumstances. 

"Consumers need to make well-informed and responsible decisions on any financial product offered to them", said Mary. "They should ask questions and get the answers they need before taking on any financial product so that they understand what they are getting into and recognise and accept the risks involved."

For further information on Savings and Investments consumers should contact the Financial Service’s Regulator’s Consumer Helpline: 1890 -777- 777. 

ends-


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## AA (24 Nov 2003)

*Grand Larceny*

Thanks, BB, for that posting.  

It's as I feared, Ms. O'Dea's response is hopelessly short of the mark - she simply doesn't understand (or does she?).





> "Geared trackers may be more suited to high net worth consumers, who may benefit from these products as part of a portfolio approach to investment. "


This is utter nonsense.  Make no mistake, Geared Trackers are Grand Larceny, they benefit nobody but the brokers, lenders and providers who dreamt them up and, also, unwittingly the Revenue.  20% of the investor's investment goes to the broker. 20% goes to the provider/lender and 23% goes in needless tax.  The customer is more than 60% out of pocket in charges and tax.  This has absolutely nothing to do with risk and sophistication.  This product  belongs in No-one's portfolio.  *There simply has never been a worse rip-off!*

Let me put an alternative interpretation to Ms. O'Dea's lack of understanding.  Isn't it possible that she has made a monumental cock-up in being tricked to appear to endorse these products and whilst now trying to redeem herself she leaves open this outrageous justification that Geared Trackers may be suitable in a HNW's portfolio.  IFSRA should be scrapped or else put somebody in there like Eddie Hobbs or even your goodself, BB,  who can see through these ridiculous devices.


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## Brendan Burgess (24 Nov 2003)

*Re: Grand Larceny*

Hi AA

I suppose that I was so pleased to see them do something about it, that I hadn't noticed that bit. Of course, Irish Life can now use it as an endorsement of their product. They were only marketing it to high net worth individuals only.

This, combined with their refusal to act on the Quadruple Bond, suggests that IFSRA does not actually understand trackers. 

Brendan


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## Ratna (24 Nov 2003)

These sexed up trackers haven't met their Waterloo because no one knows who IFSRA is!


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## bravo (27 Nov 2003)

*sexed up trackers*

I put money into one of these last week.  I have read with interest all the discussion here over the last few weeks.  A gamble on my part?  Yes indeed it is.  But so are equities generally.  I just want to gear up my gamble, and I'm doing it without having the money to do so.  I firmly believe equities are at a low point and will do very well over the next few years, so I'm more than happy to pay the extra charges that are alluded to here as I believe.  What's the worst that can happen... I pay some interest charges... so what.  I lost a lot of money in equities over the last few years so I consider this a far better gamble.


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## Brendan Burgess (27 Nov 2003)

*Re: sexed up trackers*

Hi bravo

It's important to understand the difference between investing and gambling. 

An investment has a net positive expectation. If you add up the sum of possible outcomes, you expect to make a profit on average. 

A gamble has a net negative expectation. If you add up the sum of possible outcomes, you expect to make a loss on average.

Thus backing a horse is a gamble for the punter and an investment for the bookie.

Putting money in a unit linked fund or directctly in shares is an investment. You may lose or win, but over the longer term you expect to win.

Borrowing to invest in a tracker is a gamble. Under certain circumstances, you will make money, but, on average, you will lose money. Irish Life is effectively a bookie in this situation.

Brendan


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## Brendan Burgess (28 Nov 2003)

*Bravo*

Here's an idea, Bravo.

Suppose you put the same money that you are prepared to pay in interest for the geared tracker into betting on the horses ...say follow the experts tips each day in the newspaper ... I can confidently say that you'll have more money after 5 years that you are likely to get back from the tracker ...and have a lot more fun as well.

Now here's an idea for product providers ...a new geared unit linked investment fund, which 'invests' in bets on horse racing, using the services of expert professional tipsters. The fund is unwound after 3 years, say. Sounds like just the investment for you, Bravo!

typo edited - Brendan


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## AA (28 Nov 2003)

*Gambling*

Bravo,

Gambling on the stockmarket is perfectly available through such internet exchange services as BETFAIR.COM and for as little as 10 Euro.

The charges on BETFAIR.COM are 5% of any *profit* you make and there is *no* tax.

By contrast with a Geared Tracker you pay charges of 40% and tax of 23% NOT on your profit but on your *TOTAL* investment.

Bravo, you may just have time under Cooling Off provisions to exit your Geared Tracker and make a similar punt on BETFAIR.COM and save yourself 60% of your outlay.


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## Brendan Burgess (29 Nov 2003)

*Re: Gambling*

Here is the original breaking of the geared tracker story from Niall Brady in the Sunday Tribune on 16 November which really explains it all:



> Would you spend €28,000 over the next six years for an expected payback of €21,000? Stupid question. Yet hundreds of well-heeled individuals are queuing up for just this type of investment, oblivious to the risk of a serious pre-Christmas financial hangover when their geared tracker bonds mature in 2009. The geared trackers are being sold as a free ride on the stock markets, your chance to cash in on the market rally without putting any of your own cash on the table. But industry insiders predict trouble ahead, warning that the high rollers taking a punt on geared trackers are unaware that the stakes are loaded firmly against them. The product has sparked heated arguments in the rarefied world of actuaries, who are well aware of the limitations of tracker bonds. But because their debates are conducted in private and behind closed doors, the punters signing up for geared trackers are blissfully unaware of the risks they are taking. Key elements of the actuaries’ debate, seen by the Sunday Tribune, call in question the very foundations on which trackers bonds are based. Their conclusions will make grim reading for the thousands of small savers who have poured hundreds of millions of euro into trackers as an alternative to the paltry rates of interest paid on bank deposits. The actuaries now admit that there is a one-in-three chance that these trackers will return nothing more than the savers’ original cash at maturity. Because the money may have been locked up for six years or more, this means that the nest eggs of unlucky savers will have been ravished by inflation. The actuaries also concede that that investors may have little or no chance of hitting the jackpot returns highlighted in the glossy marketing literature.
> Fans of trackers reply that the actuaries’ expected returns are little more than guesstimates of how the products are likely to perform and can vary enormously depending on how you do the maths. They believe that the pessimists have got it wrong by assuming that there is an equal chance that stock markets will go down as well as up. This flies in the face of reason when the concensus view is for continued growth in equity values, albeit at a fairly modest pace, they claim. Whoever is right, there is no denying that the people most at risk are the new crop of high-rollers who are borrowing the full cost of a flutter on the markets by signing up for the geared trackers sold by institutions such as Irish Life and ACC Bank. The borrowed cash is then invested in a tracker bond safe in the knowledge that, whatever goes wrong, the money will at least be returned at maturity to pay off the loan. So the most investors can lose is the interest on the borrowings. With interest rates at an all time low and stock markets bouncing back to life (the benchmark Euro Stoxx 50 index has rallied 10% so far this year), this looks like a pretty safe bet. Irish Life puts it like this: “The benefit of being able to borrow to invest is that you can access the potential rewards that a stock market-linked investment could provide without having to release any of the capital you have invested elsewhere.” The big problem is that, based on the actuarial guesstimates, the trackers will not deliver enough to cover the interest bill, leaving investors seriously out of pocket. In a confidential discussion paper prepared for the Society of Actuaries, Brian Woods, finance director at Ark Life, the life and pensions subsidiary of AIB Bank, ran the rule over a typical geared tracker. He concluded that investors could expect a 27% return after six years. But there is a 30% chance of a nil return and only a 1% chance of getting the maximum return because this would require all of the underlying shares to grow by 80% in six years. This means that people making the minimum €100,000 investment could expect to make about €21,000 after tax at 23%. But if they borrowed all the money at a fixed rate of 4.9%, the interest bill would come to about €28,000 over the six years.
> Woods told the Sunday Tribune: “On this model the customer pays in around €28,000 in interest over the six years  and expects on average to be paid €21,000 after tax, a loss of 25% of his outlay. There’s a 30% chance of losing the lot and a 1% chance of hitting the jackpot of €61,600 [an 80% return on the €100,000 investment after tax], which would give a profit of €33,600 after interest.” Not surprisingly, the brokers selling geared trackers are putting a different spin on what their clients could expect from geared trackers. In a letter to clients, Allied Insurance Consultants, a Dublin-based authorised advisor, has claimed they would cover their interest bills once the tracker grew by 21%. But this assumes that today’s rock-bottom interest rates will continue throughout the next six years. In his paper for the Society of Actuaries, Woods also highlighted other big drawbacks to geared trackers. He believes they are not tax efficient because, while investors must pay 23% exit tax when the tracker matures, they will get no tax breaks for the loan interest. Investors also risk being fleeced by charges, which Woods estimated at €1,750 a year for a €100,000 geared deal. Over a six-year investment term that amounts to over €10,000 in charges, including a €4,000 up-front brokers’ commission, for a net investment of €28,000. Irish Life insists that geared trackers are sold only to sophisticated investors why understand exactly what they are getting into. They are available only from a limited network of investment brokers and cannot be bought at Permanent TSB branches. The sales literature is covered in “wealth warnings”, highlighting that geared trackers are only for seasoned punters with prior experience of borrowing to invest. It also requires prospective investors to prove that they earn at least €75,000 a year. Anticipating that geared trackers could cause controversy when they hit the street, Irish Life consulted the government’s new financial watchdog before launch and it is understood that no objections were raised by regulators at the Irish Financial Services Regulatory Authority. According to Bill Hannan, chief operating officer at Irish Life and a major contributor to the actuarial debate, geared trackers are intended for investors who are convinced that this year’s rally is sustainable in the medium term. He added that Irish Life trackers maturing between July 2001 and September 2002 had yielded healthy returns of 27%-100%, although he conceded that more recent maturities have been disappointing. Hannan said that that assumptions used when second guessing expected returns must be rooted in reality. “The actuarial models are based on the assumption that markets are equally likely to go down as well as up,” he said. “This is one view of things but there are also those who believe that markets are cyclical and that currently an upward movement is stock prices is more likely than a downward movement. Whether we agree or disagree with this view, there is some demand for products that provide an opportunity to follow this trend.” If markets rumours are to be believed, this demand now runs into hundreds of millions of euro. Despite the considerable risks, there seems to be no shortage of punters chasing a free ride on a market recovery.


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## John Palmer The Wise (2 Dec 2003)

*Re: Gambling*



> 20% of the investor's investment goes to the broker. 20% goes to the provider/lender and 23% goes in needless tax.



This site has sunk to an all time low level. Did any one of the 232 viewers of this post not think to ask for an explaination of this alcohol fuelled statement.

The smug wannabe advisors, that rule the site with an iron fist, have deliberately misled the unwashed followers once again because of their twisted misunderstandings of any product that is not an index tracker.

You owe it to your ardent fanatical Anti  Adviser disciples to put them on the right road to financial ruination.


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## AA (3 Dec 2003)

*Anatomy of a Geared Tracker*

Hello, JPTW, _burp_ let me try and explain, jayz this wine is strong.

Punter pays 4,900 per anal, for the growth _burp_ in a Tracker.

Company sets up an artificial loan of 100,000 and an artificial deposit of 100,000.  Takes 1 percent on each side of this _burp_ artificial arrangement that's 2,000 in charges on an actual outlay of 4,900.   Tracker actually performs okay, returns 30,000 after six years.  Punter only paid in 29,600 so he made a small profit, what's the _burp_ problem?

Oops!  I really must give up this drink, the 30,000 is taxed at 23%.  So punter really only received around _burp_ 23,000 a loss of 7,000.  Company has made 12,000 and paid out 5,000 in commission and this Tracker actually did quite well.

Another bottle of wine and I will be investing in these things myself.


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## AA (3 Dec 2003)

*Anatomy of a Geared Tracker*

..........or to put it another way.

12,000 = 20% of original investment  AND

5,000  = 20% of original investment.


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## Brendan Burgess (26 Jan 2004)

*Ark Life*

Hi Dogbert

I have deleted your post as the  personal attack was unwarranted. 

But the subject is clearly worth discussing, so I have started a for it.

Brendan


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