Ombudsman rules against AIB for selling trackers to elderly

In today's Sunday Tribune, Niall Brady reports that the Ombudsman has ruled against AIB for selling trackers to elderly customers. These particular trackers had no downside guarantee, so they were just like equity based unit linked funds.

The Ombudsman made the point that none of the board of Barings understood what Nick ? was doing, so how could elderly customers be expected to understand trackers?

The Ombudsman made a submission to IFSRA saying that elderly people should never be sold trackers.

Needless to say, I disagree with the principle of the Ombudsman's findings. If an elderly person understands risk, then equity based investments can be very suitable.

Brendan

Re: Ombudsman rules against AIB for selling trackers to elde

The Ombudsman's submission to IFSRA on trackers is available in a [broken link removed]

It's quite interesting as it gives a rare glimse into how the Ombudsman thinks about things.

The Nature of a Tracker Bond
In the experience of this office, most of these products are in fact largely backed by financial derivatives. As the Authority points out, these instruments are extremely sophisticated. The downfall of Barings Bank has in fact been blamed on the fact that none of the Board, because of their age over 50, understood the nature of financial derivatives and thus were not aware of what was happening to the assets of their Bank.
It is not difficult to imagine that most of the elderly ustomers who form a large part of the market for these Bonds do not understand financial derivatives.

The Authority should consider whether or not the training given to the staff of the institution who sell these products is sufficient to ensure that such staff themselves in fact understand the exact nature of financial derivatives, because if they do not, it is difficult to see how they can explain the nature of the investment to the purchaser.

In the past, some of these Bonds have in fact produced nil returns for the investors, despite all the talk about protection etc. Close examination of the Bond reveals that if the Index to which the Bond is linked falls by more than a certain percent, then the investor will receive a nil return. That fact should be clearly stated, rather than being buried in the middle of verbiage. Again the question of large print and red ink should be considered. By way of illustration, at least one Complainant to this office asked that whilst he accepted that the market had fallen by 50%, all he was looking for was
his 45%. In fact the Bond contained in the small print a statement that “in the event of such a fall, the return to the investor would be nil”.

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I agree that tracker bonds are difficult to understand. But does the customer have to understand derivatives to understand them. I think the Credit Ombusman misses the point here.

And he is way off the mark in his understanding of the need for a long term approach to equity investments with this comment:

There is one further issue which does not appear to be raised in the Consultation Paper. This issue is that the design of many of these Trackers Bonds appears to fly in the face of the standard investment advice that stock market based investments should be held for a minimum of 5/7 years so that when periods of negative growth are encountered, the investor will have the opportunity for the market to recover and restore growth before the value of the said investment crystallizes. Tracker Bonds which have a strict investment period of less than this minimum recommended term and which do not permit encashment prior to the agreed maturity
date appear to this office to have a fundamental flaw in that their design runs completely contrary to this perceived wisdom. As this office has frequently seen during periods of stock market unrest, this type of Tracker Bond exposes the investor to very significant losses which are not likely to be recovered during the life of the Bond.

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But there is absolutely nothing to stop the investor staying in equity markets when the tracker matures. The vehicle may change, but that is all.

Having said that, this error by the Ombudsman is a commonly made error.

Brendan

> These particular trackers had no downside guarantee, so they were just like equity based unit linked funds.

In which case ANYBODY would be better off investing directly in a lower charges unit linked fund rather than a higher charging tracker which also doesn't benefit from dividend payments.

> The Ombudsman made the point that none of the board of Barings understood what Nick ? was doing,

Leeson.

Derivatives

Brendan, your comments are so admirably spot on.

These products are actually very transparent. It is of absolutely no interest to the investor that the transparency is engineered using complex derivatives. It is possible not to use derivatives to acheive the same promise and indeed ultimately that's what happens, what does the investor care?

The Credit Ombudsman's comparison between these retail offerings and the trading (gambling) activity of Nick Leeson is so incredibly inappropriates that we must question the motives bejnd this wild assertion.

There is a big job of The Ombudsman coming up for grabs, the Credit Ombudsman has received some stick for being sympathetic to the banks. This latest outburst is pandering to criticisms from the Sunday Tribune and are clearly unwarranted, and he knows it. It must be seen as part of his application for The Job.

For me The Ombudman should be Eddie Hobbs.

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I think the Ombudsman's comments show the uncomfortably close relationship he has has with the banks (who fund his office).

People don't necessarily become stupid on getting old. It's insulting to suggest that just because a person is advanced in years, they can't be expected to understand the detail of these schemes. If a scheme (regarless of what it is) is complex, there's a good chance that people OF ANY AGE will have difficulty in appreciating the risk if it's not explained to them.

I think the Om's comments on this occasion relate more to the bad press the banks receive when there's a perception that the elderly have been shafted. However, there's no problem, apparently, pushing the scheme onto younger people who probably don't understand it any better.

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Nick Leeson

Sluice

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Hi Spacer

I think the Ombudsman's comments show the uncomfortably close relationship he has has with the banks (who fund his office).

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So who should fund it? The taxpayer or the customer?

Your point about patronising the elderly is a good one. I think the main issue is that if you screw a younger customer, he has more time to recover. If an elderly person loses their savings, they may not be able to recover.

Brendan

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Hi Brendan

In relation to the existing Ombudsman, I'm just making the point that he's part of the banks' self-regulation process and as such isn't necessarily as impartial as he perhaps should be.

The new IFSRA-appointed regulator (whose office will also be funded by the banks) will hopefully operate to a the more overt benefit of consumers.

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Hi Spacer

I don't see him as part of the self-regulation process. They have a council with bankers and lay people on it. The Ombudsman certainly sees himself as independent.

But I agree - I look forward to the new statutory Ombudsman and I hope that the banks continue to fund it.

Brendan

Credit Ombudsman

Brendan

I think you misunderstood a few points the Ombudsman made.
I think he was alluding not to Tracker Bonds, as in the traditional sense, but to so called Index Bonds (hence the reference by the Ombudsman to the Index) sold mainly by AIB, to elderly customers, which had two features that made them unlike what might be normally called Tracker Bonds :
* they were very short term ..usually 18 to 24 months. This is a very short period to be taking a ‘point to point’ punt on the movement in one particular index, say Eurostox 50
* they had limited or no capital guarantee. For example earlier (pre 2001) versions of the Index Bonds provided that the maximum you could lose was, typically, about 10%. However some time in 2001 AIB switched the product design to the first, typically, 10% fall in the value of the Index being absorbed by AIB, but the balance of the fall being suffered by the investor. Some investors over 18 months, when the index fell by circa 50%, lost 40% of their funds.
I agree these products are not strictly traditional Tracker Bonds, but the problem is that there is no definition of what a Tracker Bond is. The Index Bonds, described above, with unlimited exposure to the investor (after first 10% fall in index value) were shown in AIB brochures as a LOW RISK investment, below a Managed Fund! This can’t be right. There Index Bonds were totally unsuited in term, index link, and limited degree of capital protection to elderly investors.

So I think you’re being a bit too harsh on the Ombudsman here ..although I accept that its ironic that the Ombudsman’s comments show that he himself doesn’t understand what a Tracker Bond is!

MY own feeling is that there was an element of ‘set up’ here with regard to the Ombudsman’s submission to IFSRA on Tracker Bonds. Significantly if you read it the preface says that he is making the comments at the request of George Tracey of IFSRA. If that’s the case why wasn’t the Insurance Ombudsman asked to make a submission?

I suspect the Credit Ombudsman is being lined up by IFSRA to become the new Financial Services Ombudsman , in preference to the Insurance Ombudsman. IFSRA would feel a far closer relationship with the Credit Ombudsman who , by and large, has been a pussy cat with the main banks.