Last month it was revealed that the Financial Services Compensation Scheme has compensated investors in Providence Bonds and Secured Energy Bonds in full (up to £50,000), paying out a total of £10 million (£5 million for each).
Providence and Secured Energy Bonds paid interest of 8.25% and 6.5% per year. Both collapsed with total losses to investors.
Investors brought Financial Ombudsman claims against Independent Portfolio Managers, who approved the schemes’ literature, enabling the investments to be promoted to retail investors. These complaints were initially rejected on the basis that they were not customers of Independent Portfolio Managers, Providence / SEB was.
The investors took legal advice, and before the matter went to court, the FOS changed its mind and began looking into complaints against IPM. An Ombudsman found against IPM in three published cases. IPM went bust shortly after, over an unpaid regulatory fee.
Those FOS decisions against IPM allowed the investors to claim on the FSCS.
Last year I poured cold water on the hope that investors would be compensated, saying that if the FSCS did so, it would effectively make all unregulated investments risk-free, provided the investment wasn’t too lazy to jump through the hope of finding an FCA-regulated company – any FCA- regulated company – to approve its literature.
Naturally I am delighted for the investors that I have been proved wrong. And in fairness, I was in good company. The FOS also initially rejected investors’ complaints. And back when Secured Energy Bonds and Providence Bonds were being promoted to investors, nobody told them that the investments were in fact 100% risk-free (up to £50,000) by virtue of the fact that the literature was misleading and approved by the investment’s Corporate Director.
(undermisselling (n.) – The act of an FCA-regulated company selling a supposedly guaranteed investment that is too good to be true, and by thus misselling it, making it actually true, but not making it clear that it is too too good to be true to not be true.)
I have previously asked: if investors are compensated on the basis that IPM was personally liable to them for misleading literature, does this mean any investment with Section-21-approved misleading literature is risk-free?
Independent Portfolio Managers was specifically sanctioned by the FOS for promoting security features of the investment (the fact that the bonds were secured loans and the existence of a Security Trustee) without equally prominently highlighting the risks (the fact that secured loans can still lose all your money and the Security Trustee, which was none other than IPM, was as much use as a chocolate fireguard).
The FOS found IPM was liable directly to investors because it not only approved the literature, but acted as Corporate Director and Security Trustee to the bonds.
Part of the reason IPM’s expertise is relevant over and above their ability to review the materials is that it had an ongoing role in the investment scheme, approving new documents as they are created.
The expertise is relevant to IPM’s status as Corporate Director which was a non-contingent role that was promoted as part of the security of the bond. And IPM’s expertise was relevant to its contingent but nevertheless prominently proclaimed status and role as Security Trustee by which it might have to intervene to manage the investor’s asset. IPM was in effect being advertised as a manager of the investor’s assets upon a condition being met: this is an active (albeit contingent) managerial role,to which IPM’s expertise is relevant.
[…] The purpose of IPM’s involvement in the arrangements was to bring about the investment.
I can think of many unregulated bonds with literature approved by an FCA-regulated third party, but none of the top of my head where the same third party acted as Security Trustee or Corporate Director, that are still in business.
The FOS might still find the company that signed off the literature liable for “bringing about the investments” – anything’s possible – but its decisions against IPM are not a precedent.
(I’m using precedent in a general sense – FOS decisions do not set legal precedent in the same way a court case does.)
Good news for payers of FSCS levies that the practice of FCA-regulated companies misselling bonds and also acting as Security Trustee, in doing so making them FSCS-eligible, appears to have ended.
If only the same was true of the practice of FCA-regulated companies misselling unregulated bonds at all.