On 4 October, the FCA announced that Catalyst Investment Group was to be censured for misleading investors when promoting life-settlement bonds offered by Luxembourg-based ARM Asset Backed Securities between November 2009 and May 2010.
Woeful distribution
Catalyst distributed the bonds to retail investors in the UK (and accepted their funds) through intermediaries even though the Luxembourg regulator, the CSSF, had not granted a licence to ARM and had even asked the firm to stop issuing the bonds in November 2009.
The firm did not tell investors of the situation regarding ARM’s licence and continued to accept as much as £54m into the ARM bonds listed on the Irish Stock Exchange – including £17.1m in un-issued ARM bonds – generating millions of pounds of commission in the process.
In November the FSCS hopes to be able to confirm the process for investors to make their compensation claim which it says could be tens of millions of pounds.
One thing the FSCS has already confirmed is that intermediaries will have to foot the compensation bill.
Earlier this month the FSCS chief executive Mark Neale said: “I do expect one consequence to be that FSCS will have to raise a supplementary levy on investment intermediaries before the end of levy year in June 2014. We know this will be difficult for firms and is unwelcome news, but we have a duty to compensate investors with a valid claim.”
Keydata – still an ugly word – is a remarkably similar story in that it too distributed structured bonds through UK intermediaries to 20,000 investors that were backed by US life policies.
The FCA’s official line is it “views TLPI [traded life policy investments], such as ARM bonds, as complex, high risk and unsuitable for most consumers. The FCA has recommended that these products should not be marketed or sold to the mass retail market.”
In June this year, after a review of TLPI sales, the FCA announced: “We are worried that this market could grow and cause further customer losses in the future. As a result, we have recommended that these products should not reach ordinary retail investors in the UK. This would mean that firms should not be marketing, recommending or selling these products to the mass retail market.”
Fair’s fair
The question I have is whether there is another way of compensating the investors who have lost out rather than an extra FSCS levy.
Rather than asking those wealth managers, IFAs and fund managers who have sold appropriate products to appropriate customers to foot the bill, could a firm marketing an unregulated, leveraged, esoteric, non-standard fund to be expected to do so?
Given the inherent risk of the underlying product (it might have been wrong to do so, but the FSA describing TLPIs at ‘toxic’ is a bit of a giveaway) should ARM and maybe even Catalyst have been expected to hold greater levels of cash?
Is there a professional indemnity insurance argument to this? If the rates were prohibitively expensive then there is your answer.
The concept of the FSCS is a great one – the fact that there is protection from a compensation fund of last resort cannot be anything other than a good thing – but there has to be a fairer way of funding it, with a greater onus on the product manufacturer (in this case, ARM) and distributor (Catalyst) to finance it. If it makes riskier products unmarketable then everyone’s a winner.
Or has RDR really not improved advice standards at all?
