Just over a year after the collapse of Lehman Brothers, the Financial Services Authority (FSA), the City regulator, has finally moved to help thousands of investors who had schemes backed by the American investment bank — many of them unwittingly.

Last week, two of the firms that offered so-called structured products backed by Lehmans — NDF Administration (NDFA) and Defined Returns Limited (DRL) — were placed into administration. The FSA pushed the firms down the administration route because it means investors can now claim back their money from the Financial Services Compensation Scheme (FSCS), rather than having to complain to the firms and then the Ombudsman — a fraught process many consumers abandon at the first hurdle.

The downside is that FSCS claims for investments are capped at £48,000, whereas the Ombudsman can go up to £100,000 — so some investors may not be covered in full. However, they could still lodge a claim against their financial adviser with the Ombudsman if they get no joy against NDFA and DRL from the FSCS. The firms’ administrator, Grant Thornton, will be writing to all customers with Lehman-backed products in the coming weeks.

The FSA’s action is not before time — it has been painfully slow to act on structured products and even now is letting firms implicated in the Lehmans debacle sell to private investors.

Structured products are schemes that offer a set return based on an underlying market index, such as the FTSE 100, plus some or all of your capital back at the end of the term. For example, a plan might offer 50% of any growth in the Footsie over five years plus your capital back in full, or an income of 8% a year for five years plus your capital back as long as the index does not fall by more than 50%.

These guarantees are provided by entering into complex contracts with an investment bank, known as a “counterparty” — in the case of about 20 plans from Arc Income & Capital, DRL, NDFA and Meteor, they used Lehman Brothers. Of 35,000 investors in NDFA and DRL, about 10% are thought to be in plans backed by the American bank.

The companies were launching products backed by Lehmans right up until the weekend before it collapsed, even though the sector should have been on the FSA’s radar following the precipice bond scandal (also involving structured products) back in 2003.

Indeed, some of the people involved in selling precipice bonds resurfaced at the firms selling structured products backed by Lehmans, suggesting the FSA is simply playing catch-up rather than dealing with the root causes. It took the FSA until May to announce a review of structured products in general. Now investors with two of the four firms have redress in sight, but that still leaves customers of Meteor and Arc to go to the Ombudsman if they feel they have a case.

Meanwhile, Arc last week launched a product paying a mouth-watering 17.25% for up to five years. The scheme is linked to the FTSE 100 and S&P GSCI Crude Oil ER indexes, and will close early if both are at or above their opening levels on any of the plan’s anniversary dates. So if it closed on the first anniversary, you would get back 17.25% plus your capital; on the second you would get 34.5% plus your original investment. Your capital is at risk only if the final level of either or both of the indexes is more than 50% below their opening level at the end of the term, at which point you would lose 1% for each 1% fall in the index.

Arc clearly hopes both oil and the Footsie will rise from here and the plan will close early, in which case, 17.25% isn’t bad at all for a year. However, it is able to offer such a good return because it has used one of the financially weaker investment banks — Citigroup, which has a single-A rating.

This could be a great bet for the more sophisticated investor, but it is generally cautious savers who are attracted to structured products.

The FSA says it doesn’t concern itself with individual products but, with a return as high as 17.25% likely to pull in desperate pensioners, it needs to put a line under the structured product debate once and for all.

Kathryn Cooper is editor of the Money section

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