Imagine this. You've just retired and are wondering what to do with your life's savings. It's all you have, and you need to keep it safe. You go to a professional financial adviser, who correctly evaluates your risk profile as 'cautious'. He offers you a Stocks and Shares ISA that is "100% capital secure". Whatever happens to the stock market, you are told: "your initial capital investment will be returned to you in full". This assurance is repeated eight times across three pages of the booklet you are given.
Sounds great, you think, and hand over every penny you have.
A few months later, you're watching the news. Lehman Brothers, the investment bank, has gone bust and people are trailing out of the offices carrying cardboard boxes. Nothing to do with you of course... but as you're watching, the phone rings. It's your financial adviser.
"Um, you know that 100% capital secure investment I sold you? That's right, the one that promised you full capital protection? Well, I'm afraid I have some bad news...."
Everything - all the savings you had in the world - has disappeared into the black hole of the biggest bankruptcy filing in history. You now have the dubious honour of being a Lehmans creditor. And you are told you will be lucky to ever see a penny of your life savings again.
And all because, unbeknownst to you, the 'issuer' of this plan was Lehman Brothers. Turns out your capital wasn't 100% secure after all - it was only as secure as Lehman Brothers.
"Sorry about that," says your financial adviser.
A mis-selling scandal?
Believe it or not, this terrible nightmare has actually come true for 6,000 people, who have lost £32,000 each (on average) by investing in these supposedly low-risk 'structured products'. Some have lost even more; one man put in £200,000, netting his adviser a £12,000 commission.
Many of the people who invested their cash knew nothing about investing. They deliberately went to a financial adviser to get help and guidance. Most are pensioners, while one investor is over 90 years old.
Did the plans give any warning of the risks at all?
See what you think. In one booklet touting these plans in April 2008, after pages of repeated assurances that the capital will be returned to the investor in full, there's this warning: 'There is a risk the Issuer may fail to meet its obligations.'
That's it.
Not one word about the fact that the issuer is an American investment bank (Bear Stearns had already run in trouble the month before) or specifically, Lehman Brothers (which reported billions of losses just a few weeks later).
No explanation in plain English that, if the issuer 'fails to meet its obligations', the investor loses everything.
Yet, according to both financial advisers and the firms that marketed these plans, investors should have inferred from this statement alone that their capital is not 100% secure, despite the repeated earlier assurances to the contrary.
At one point, there is even a reference in the booklet to the protection offered by the Financial Services Compensation Scheme, set up specifically to pay compensation to consumers who lose out because a financial firm goes bust. But despite this reassurance investors are not covered - because Lehmans, as an investment bank, was not a member of this scheme.
In my opinion, this is a massive mis-selling scandal. So, what's being done about it?
The progress so far...
We named and shamed the companies involved back in November.
Since then, the issue has been highlighted in the financial trade press and The Sunday Times, while BBC programme Working Lunch has reported the stories of some of the victims. The chairman of the House of Commons Treasury Committee, John McFall, has asked the Financial Services Authority (FSA) to look into claims investors were mis-sold these plans, and the MP for Wantage & Didcot, Ed Vaizey, is forming a group of MPs to support the investors. Plus, an action group, SPIRIT (Structured Products Investors Recovery & Information Team) has been set up by one of the victims, Peter Howard.
But little has been done to offer the affected investors practical advice. If you're a victim of this scandal, here's what you should do:
1) Join SPIRIT.
As part of the action group, you'll get regular updates on the progress of the fight to get your money back. The group has two main objectives: to make sure all victims lodge their complaint with the Financial Ombudsman Service, and to convince the FSA to investigate the way these products were sold and marketed. To join SPIRIT, email Peter Howard at spiritedawaybylehmans@hotmail.com
2) Express your concerns to your MP.
Don't just write a letter - go to the MP's surgery and explain your situation face-to-face. Let your MP know that a group is being formed by Ed Vaizey, and tell SPIRIT the name of your MP, so he or she can be added to the list of contacted MPs. Ask your MP to call for the FSA investigation on your behalf!
3) Complain to your financial adviser.
The FSA states that a product has been mis-sold if:
- The product was not a suitable recommendation
- The risks were not clearly explained.
So for example, if you told your adviser that you did not want any risk to your capital, you could argue that the product was an unsuitable recommendation, and therefore mis-sold to you.
Similarly, the repeated assurances that your capital will be returned to you are also worth mentioning. Did you did fully understand the risks - i.e. that your capital would be lost if Lehmans went bust? Did your adviser mention this risk to you? Did he or she look into the risks of investing with Lehman Brothers and give you tailored advice? If the adviser did not clearly explain the risks of the product, you may have a case for mis-selling.
4) Complain to the company that marketed and sold the plan.
So, for example, NDFA, Arc, DRL or Meteor. The FSA states that financial advertising and marketing literature must be:
- clear,
- fair, and
- not misleading.
Do you believe that the literature breached this requirement?
It may be worth pointing out in your letter how many times the literature said your capital would be returned to you and that your capital was secure.
Similarly, you may wish to point out that Lehman Brothers was downgraded from an A+ rating to an A rating on June 3rd. Some companies stated that funds would only be placed in financial institutions rated A+ or higher. And if you took out your plan after the 3rd June, was the downgrade mentioned?
Finally, you may want to emphasise that, because the name of the issuer was not disclosed in the marketing literature, you were unable to do your own research to assess the risks of the investment.
5) Finally, complain to the Financial Ombudsman.
Note that you can only do this once you have received letters back from both your financial adviser and the firm that sold you the product, and you are unhappy with their responses. Find out more here.
According to FSA compliance experts, Temple Regulatory Services, you should:
- Keep your letter as factual as possible.
- Describe in your own words what you told your adviser about the type of investment you wanted, and what you were told in response by your adviser.
- Describe how the risks were explained, and how the product was represented.
- Describe your understanding of the literature and how you interpreted the assurances, as well as the risk warnings.
Then, re-cap the arguments you've already put forth in the letters to your adviser and the company that sold you the plan.
Good luck.
If you'd like to share your thoughts about any aspect of this article, please comment below!
Nothing in this article should be taken as legal advice.