3,700 investors to pursue Lehman claims

Thousands of investors may be able to reclaim some of their money from Lehman Brothers-backed structured products, after two providers went into administration this week.

NDF Administration (NDFA) and Defined Returns Limited (DRL), which marketed structured products to retail investors, were forced into administration after concerns were raised that their marketing literature did not adequately explain the risks to investors.

The move means that the 3,700 investors with the two companies are now eligible to make a claim with the Financial Services Compensation Scheme (FSCS).

It is the first step in a clampdown on these products after the Financial Services Authority (FSA) confirmed last month that it had found “serious issues” with structured product providers and would be taking action against firms.

The FSA began an inquiry into the products after the Financial Ombudsman Service alerted it in May to an unusually high level of complaints about Lehman-backed structured products, raising fears that investors had not understood the risks involved.

The ombudsman said this week that complaints about Lehman-backed structured products had more than doubled since May when it first alerted the FSA to the problem. Some 170 customers have now registered a complaint.

Structured products usually offer a return of the original sum invested at a certain date, plus a return linked to an underlying index. Most offer a full or partial guarantee that all the capital invested will be returned when the product matures. But the “guarantee” is not watertight. Typically, the plan provider will invest some of the investors’ money into a zero coupon bond offered by another counterparty bank – such as Lehman Brothers – which will have a redemption value equivalent to the total amount invested. So investors buying structured products are exposing themselves to counterparty risk, which is often unclear. Some providers do not even state who the counterparty is, making it difficult for investors to assess the risks involved.

Lehman-backed structured products were sold to 5,600 retail investors in the UK, who incurred total potential losses of £110m after Lehman went into administration last year, leaving investors unable to access their money.

The total value of retail structured products in the UK is more than £38bn, according to structuredretailproducts.com.

NDFA and DRL opted to go into administration rather than face possible payouts to customers who had lost money. But investors will still have to wait before they can get their money back.

In order for the compensation scheme to kick in, a company has to be officially declared in default. The FSA confirmed that NDFA and DRL were in default this week, but the FSCS said it was “too early” to say which products were affected and which investors could be eligible for compensation. It stated that it believed some marketing materials were inadequate and could give rise to claims from investors.

Investors have been told to wait for the FSCS to update its website before getting in contact. Claims will then be processed within six months of being received. But some will not get all their money back – investment claims with the FSCS are capped at a maximum payout of £48,000.

The FSA is expected to report on its wider investigation into structured products later this month.