Large current account balance? Don't fall for this rip off

If you have a lot of money in your current account, banks will try to flog you these appalling investments. Don't fall for the sales pitch!

The banks face an ever-increasing bill for payment protection insurance (PPI) compensation. The cost could top £10 billion, taking in repayments to victims, plus huge legal, administrative, and systems costs.

The banks are unmasked on this one. But there is another bank mis-selling scam bubbling under, with very little said. For reasons that I can't really remember I use two current accounts. And as a freelance writer paid gross, I have to keep back earnings to hand over to HMRC.  Sometimes, ahead of a payment day, I have quite a bit in my accounts.

I can't spend it as it's not my money – it belongs to the taxman. But that does not stop bank computers sending an large account alert to cashiers when I pay something in.

Why not switch?

The bank staff are then prompted to sell an investment product. They have an on-screen script, often read like a cop on one of those road crash shows reciting their rights to an arrested person.

This is how the pitch tends to work: “You've got a lot of money in your current account, earning no interest. Why not switch it to this great deal and do better?”

This “great deal” is a complex product based on futures, options, swaps, swaptions and many other of the esoteric vehicles which played such a major role in the banking crash four years ago.

But that's not on the script. What they are told to say is that you could do better with a stock market investment which can give you the best of all worlds – it goes up if shares rise but you are guaranteed to get all your money back – plus 2% – if equity prices fall.

A win-win investment...

It's win-win! “So why not sit down and talk to my colleague about it,” the prompt says. You don't have to be a sales psychologist to know resistance is harder when sitting face to face with an “expert” than standing in a counter queue.

What you will be sold is a punt on UK shares dressed up as a must win, can't lose proposition. It will probably be called something like 'Stock Market Bond'. The script emphasises that share prices normally go up and beat cash over time, and that the bond is risk-free as you always get back your original deposit plus 2%.

By now, most people will be convinced. But mine down to the small print and beyond, and this is really a rubbish product, which the bank and the branch staff will be well remunerated to sell.

... that's absolutely rubbish

These bonds lock up your money – typically for five and a half years – whereas the cash in your current account is available now. If you want early repayment, there will be a penalty.

That 2% is not per year (like most interest rates) but over the whole period. That works out at about 0.3% a year. And you usually only get it if the chosen stock market index (usually the FTSE 100) fails to rise 2%. But if the index soars over the period – perhaps it doubles – you won't get that gain on most products – they are generally capped at 60%.

To make matters worse, you don't get the dividends on the FTSE stocks in the bond. Currently, the dividend return on the FTSE100 is 3.83%.  Compounding that over the lock-in period but subtracting the fees of a low cost tracker (about 0.3% a year) gives around 20% - perhaps a little more as dividends tend to rise.  So, assuming the index remained static, my £10,000 would be worth about £12,000 after the period but just £10,200 in the bond.

Where that money goes

Who keeps that extra cash?  Who keeps any amount over the cap? You don't need a postcard for the answer – it can be written on the back of a stamp. It's the bank. And the bank also wins because the money is not actually invested in the stock market. Some bonds are designated 'deposits', attracting Cash ISAs, even though the risk profile is quite different.

Should you ask – and most won't – you'll be told there are no fees and no direct commission. This is true – bankers don't lie. But who needs fees when the product works in your favour like this?  As for commission, there are plenty of indirect payments as a new report from the FSA  makes clear. Check out FSA clamps down on ‘flawed’ bank bonus schemes for more

The report uncovered well-known tactics such as paying teams in incentives (like days out of the office) rather than cash to individuals, branch “races” where the first to hit a target gets a special bonus, and super-bonus schemes where staff are expected to sell as part of their normal work but receive a salary boost if sales over a quarter or a year top a set figure. These are all designed to break commission-style direct links between sales and individual earnings.

The only difference between regulated companies mis-selling and pure scamming by rogue firms is victims of the former stand some chance of recompense – the latter group get nothing.

More on scams and rip-offs:

UCIS: FSA clamps down on exotic investments

The email phishing scam that relies on your stupidity

Get ready for a rise in crowd-funding scams

Telephone Preference Service is failing to cut out cold calls

The 'get rich from your sofa' scam