THE ombudsman for credit institutions, Gerry Murphy, has taken the banks to task for encouraging pensioners and other vulnerable people to lock away their savings in tracker bonds.

The ombudsman's warning follows a Sunday Tribune investigation which revealed that hundreds of AIB customers may have lost a large portion of their life savings after switching their money from deposit accounts into two- and three-year index funds sold by the bank in 2000 and 2001.

Many failed to realise that their savings were fully exposed to the subsequent stock market crash and sustained losses of up to .20,000 when the tracker bonds matured in recent months.

In a submission to the Irish Financial Services Regulatory Authority, Murphy questions whether elderly people should ever be encouraged to invest in trackers, where returns are linked to the performance of complex financial derivatives.

"The downfall of Barings Bank has 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, " he said. "It is not difficult to imagine that most of the elderly customers who form a large part of the market for these bonds do not understand derivatives." The ombudsman also questioned whether such people should be encouraged by the banks to lock up their savings for long periods.

"This office is aware of cases where investors of very advanced age. . . have invested in bonds of this type which meant that their total funds were locked up for the term of the bond, " he said.

While most tracker bonds offer money-back guarantees, the index funds sold by AIB protected customers only for a fraction of the fall in European stock markets, resulting in huge losses. One Sligo widower invested .76,184 in 2001 and got back only .55,319 when the fund matured. A Dublin pensioner invested .33,000 in the same product and got back .21,000.

Another pensioner lost almost .14,000 in two years.

"I am 72 and living on a small fixed pension, " he said. "Last year I moved to France as I was finding it harder to manage my financial affairs. I trusted my bank manager's advice as I have been a customer of AIB for many years."