Corporate bonds - Fscs scheme ?

marathon_man_3

I have a friends who tells me that he has some corporate bonds with both Aviva and Legal & General that are both covered by the FSCS.
I think this is wrong and that the higher rate he gets is because there is no compensation available and he is carrying the risk

Who is right ?

masonic

An investment fund containing corporate bonds would be covered by the FSCS compensation for investments, which does not cover normal investment losses - only losses due to Aviva / L&G, or the fund provider (if different) becoming insolvent, or compensation for bad regulated advice.

Individual corporate bonds are not covered by the FSCS.

DrSyn

What is the "higher rate" he gets, that you mention in your post?


As masonic states, Individual corporate bonds are not covered by the FSCS.

Perhaps your friend should read this:

https://www.telegraph.co.uk/investing/bonds/retail-junk-different-types-saving-investment-bond-explained/


What would happen if a mutual fund manager were to default?

A fund manager is required to appoint a depository and custodian. One of the primary functions of the custodian is the safekeeping of securities and cash in deposit accounts, held in the name of the depository. This has the effect of segregating the funds from the fund manager’s own monies and effectively protects the client’s investments should the fund manager become insolvent.

From the client's perspective this means that the only time they should need to look to the FSCS for compensation would be in the event of the fund manager acting dishonestly, fraudulently or negligently.

dunstonh

marathon_man wrote: »

I have a friends who tells me that he has some corporate bonds with both Aviva and Legal & General that are both covered by the FSCS.
I think this is wrong and that the higher rate he gets is because there is no compensation available and he is carrying the risk

Who is right ?

Individual corporate bonds are not covered by the FSCS.
Unit Trust/OEIC funds investing in corporate bonds are covered by the FSCS.

So, if you buy an L&G or Aviva corporate bond, you get no FSCS protection. If you buy L&G/Aviva Corporate bond fund then you are covered by the FSCS.

A caveat to that... If you buy a corporate bond under advice, then you are covered under the FSCS if the advice was unsuitable (for most people, unregulated investments could be considered unsuitable if its more than 5% of your assets in a single one and 25% overall. )

short_butt_sweet

dunstonh wrote: »

So, if you buy an L&G or Aviva corporate bond, you get no FSCS protection. If you buy L&G/Aviva Corporate bond fund then you are covered by the FSCS.

in the latter case, you're covered only in the case of things like the fund manager running off to brasil with the fund's cash, instead of using it to buy corporate bonds. (which is a very remote risk anyway, because of the requirement for funds to appoint a depository and custodian.)

you're not covered in the case that the fund has bought corporate bonds as it should, but then the issuers of those corporate bonds default on their obligations to repay the bondholders.

so what you're not covered for in the case of the corporate bond fund is basically exactly the same risk (bond issuer default risk) you're not covered for if you buy corporate bonds directly.

corporate bond funds do have the advantage that they can spread your cash across bonds from a larger number of issuers than you might find it practical to buy directly. which means they are unlikely all to default at the same time. so whilst all your investment in a corporate bond fund is subject to bond issuer default risk, that risk is less concentrated.

Lewisscott

I have Corporate Finance Bonds series 10 which are now delisted and cancelled. Can I claim on FSCS as I was not made aware that my DFM was buying them.

dunstonh

Lewisscott said:

I have Corporate Finance Bonds series 10 which are now delisted and cancelled. Can I claim on FSCS as I was not made aware that my DFM was buying them.

Corporate Finance Bonds do not get FSCS protection themselves.    If a DFM holds them within a portfolio then you do not get FSCS protection either (as its no different to holding shares).  DFMs are fund managers with discretionary powers. They don't have to run their purchases and sales through you.  
If you used a financial adviser and the advice was not suitable then you could get FSCS protection.    Although you mention they were bought via a DFM and not an adviser.