Private investors who bought any structured products – not just those backed by the bankrupt US bank Lehman Brothers – may now be entitled to compensation for unsuitable advice, after a wide-ranging review by the Financial Services Authority (FSA).
This week, the UK regulator published the findings of two separate investigations: one into the advice given on Lehman-backed products and another into the “financial promotions” used to sell 56 other products. The FSA also said that it was ordering six financial adviser groups, responsible for more than half of all recent structured product sales, to review the advice they gave and provide redress to investors sold inappropriate investments.
Structured products that used Lehman Brothers’ bonds to provide capital protection were offered by four UK plan managers: NDF Administration, Defined Returns Limited, Arc Capital & Income and Meteor. All apart from Meteor have been forced into administration in the past fortnight, as it became clear that claims against them for inadequate risk warnings could render them insolvent.
Their Lehman-backed products were sold through 575 advisers to approximately 5,600 private investors, who lost an estimated £107m when Lehman Brothers filed for bankruptcy protection in September 2008.
In early 2009, the FSA began its review of the marketing and distribution of Lehman-backed products, which has now revealed “significant advice failings” at more than two-thirds of the financial adviser firms that sold them, as well as “serious deficiencies in the marketing literature” produced by some managers.
In a sample of 157 sales through 11 different intermediaries, the FSA said the advice given was “unsuitable” in 46 per cent of cases, and “unclear” in 23 per cent of cases. At nine of the 11 adviser firms, the regulator identified “significant levels of unsuitable advice”. Three of these firms now face regulatory sanctions from the FSA and 10 have been ordered to carry out reviews of their business. Examples included recommending products that failed to meet investors’ needs and timeframes, or exposed them to an inappropriate level of risk – in some cases by over-concentrating their portfolios in these products. In addition, the FSA found a widespread failure to adequately disclose the “counterparty risk” to customers – ie that the protection of their original capital was dependent on Lehman Brothers’ financial strength.
As a result, the FSA is offering investors two ways to seek redress. “Given the failings in the marketing and selling of these products, we are setting out a package of robust measures to help those who have lost money,” says director of conduct risk Dan Waters.
Investors who bought Lehman-backed products managed by NDF Administration, Defined Returns Limited, Arc Capital & Income may be entitled to compensation from the Financial Services Compensation Scheme (FSCS), as these managers have been declared “in default”. Holders of these products will be contacted by the managers’ administrators with information on how to claim.
Investors who bought Meteor’s Lehman-backed products do not have a claim against the provider but will receive letters direct from the FSA giving guidance on making a complaint if they received bad advice. A spokesman for Meteor says: “We can confirm that FSA has not raised any concerns over our financial promotions.”
Structured products not backed by Lehman Brothers were investigated separately under an FSA marketing review of providers’ ‘financial promotions’. Among the 56 products studied – 43 of which were launched in the second quarter of 2009 – the FSA found many with marketing brochures that “had failings and, in particular, could have described the risks more effectively”. If investors believe counterparty risk was not made clear, redress may be due. “The FSCS will look at the case in the round and judge whether an investor was well informed,” Waters says. “If counterparty risk wasn’t disclosed, that could be enough, in my view. It’s not good enough to have it buried in the small print – it’s got to be clear, and it’s got to be understandable.”
Barclays Wealth, which is one of the largest providers of structured products in the UK and uses Barclays Bank plc as its counterparty, says: “We are satisfied that our material is fit for purpose.”
However, the focus of the FSA’s attention is now turning to the advisers who sold non-Lehman products. Six of the largest sellers of UK structured products have until January to review past sales and inform the regulator of cases where redress may be appropriate.
Consumer groups have welcomed the FSA’s action but called for greater openness. Dominic Lindley of Which? says: “This seems to be yet another case of some advisers giving unsuitable advice on products they didn’t understand. Product providers used words such as ‘safe’, ‘secure’ and ‘guaranteed’ to describe products which were anything but.”
But investors who cannot prove that they received inappropriate advice cannot expect redress, lawyers say. “Investors in Lehman-backed products need to understand that they will only get compensation when actually misled or misadvised,” warns Simon Morris of CMS Cameron McKenna.
