Up to 50,000 LloydsTSB bond holders may be able to claim compensation following a key ruling by the Financial Ombudsman.

After hearing the case of one customer, the Ombudsman ruled that literature describing the Extra Income and Growth plan did not state that the risks were significant.

The Financial Services Authority is also investigating how the products were sold. This could lead to a fine and compensation for customers.

The bond was sold by Scottish Widows, which is now owned by LloydsTSB. It promises a return of up to 10.25% a year.

Disappearing capital

The income promise is being honoured. But the capital, which is linked to the value of shares in 30 companies, is disappearing rapidly.

"You are linking your investment to direct equities. So it is like buying shares directly or a tracker fund." Independent Financial Advisor Vivienne Starkey told the Money Box programme.

Hundreds of customers have complained to the Ombudsman that the risk to their capital was not fully explained.

The literature describing the bonds does state that the capital may not be returned in full. And LloydsTSB claims there are 15 warnings on it.

But the Ombudsman still ruled that the documentation did not state that the risks were significant.

Advice

Vivienne Starkey told Money Box that although literature does play a part when making an investment, the advice you receive is also important.

"You go to an adviser for advice. They should go through all the alternatives. They should know your position. They should explain what the risks are."

Money Box listener Margaret regrets her decision to invest in the bond.

When cash in her Tessa account was maturing, Lloyds invited her in to discuss what she could do with it.

"When we were talking to the advisor, at no point were we advised on any other product.

Risk

"Had there been a range of products presented to us, I probably would not have chosen this one. The advisor never really discussed our attitude to risk at all."

On this Vivienne Starkey says "A Lloyds advisor should have gone through her position and come up with some alternatives."

Money Box asked Lloyds TSB to talk about the implications of the decision but the interview request was turned down.

But it did provide a statement. It said "We recognise that there have been a number of customer concerns... and have been dealing with these on an individual basis, undertaking a full review of each case."

LloydsTSB went on to say "No system is perfect and where we believe the Extra Income and Growth Plan sold was not appropriate... we are compensating the investor."

However, a few months ago its head of retail banking told the programme the bond was "an excellently designed product".

And when Money Box asked for figures showing how much people had already lost, the bank refused to release them.

BBC Radio 4's Money Box was broadcast on Saturday, 18 January 2003 at 1204 GMT.