Millions have been taken for a ride by the financial services industry

From The Sunday Times
March 8, 2009

If only we'd kept our cash under the mattress
Millions have been taken for a ride by the financial services industry


Kathryn Cooper and Ali Hussain
MPs are demanding an investigation into the mis-selling of “safe” investments as thousands of people have been let down yet again by the financial-services industry.


Last week, John McFall, chairman of the Treasury committee, asked the Financial Services Authority (FSA) to look into claims that investors were mis-sold “secure” structured investments.


These promised to protect capital even if the market fell, but it turned out that many of these so-called guarantees were backed by Lehman Brothers, the collapsed American investment bank.


Legal & General wrote to 2,300 clients, with more than £33m invested in two of its structured products, warning that up to 20% of their investments were exposed to the failed bank. L&G had promised 130% of the growth in the FTSE 100 on one plan, plus capital back at the end of the six-year term — something it is unlikely to deliver.


The schemes continue to be sold: last week Barclays and Alliance & Leicester both launched new plans.


The crisis is the latest in a long line of mis-selling scandals spanning nearly two decades. Millions lost out in the 1980s pensions mis-selling scandal, when they were advised to switch from low-risk final-salary schemes to riskier personal pensions.


In the late 1980s and early 1990s, consumers were promised endowment plans would pay off their mortgages at maturity, but millions were left with hefty shortfalls and hold poor-performing plans — from which insurers are still deducting charges.


Then, in the 1990s, thousands of people relying on supposedly safe “zeros” to pay school fees or fund retirement suffered heavy losses in the bear market.


“Splits” were a class of share issued by split-capital investment trusts, companies listed on the stock market. Zeros paid a specific sum on a set date and were therefore considered a lower-risk investment. However, splits borrowed heavily to invest in each other’s shares in the bull market of the 1990s, only for these cross-holdings to exacerbate their losses when stock markets dived between 2000 and 2002. Investors lost an estimated £600m.


Although compensation has been paid, there are fears that this downturn will reveal further mis-selling scandals.


Danny Cox of adviser Hargreaves Lansdown said: “The root causes of past scandals were a lack of clarity and the fact that many mis-sold investments were pushed by commission-based advisers. Things have tightened up, but many problems persist. People don’t question when things go well, but when things go bad all the problems come out of the woodwork.”


Complaints about investments to the Financial Ombudsman Service are expected to rise by 40% this year. Upheld complaints increased to 50% in 2008 from 38% in 2007. The FOS said a “large proportion” of complaints related to investors being unaware of potential risks.


There is light at the end of the tunnel, though. The Retail Distribution Review will see an overhaul of the way investments are sold by 2012. Hidden commissions are expected to be replaced by upfront fees, as well as an increase in the qualifications required by advisers.



AIG


Even sophisticated investors have not been immune from the financial crisis.


Sir Keith Mills, the multi-millionaire founder of the Airmiles and Nectar loyalty schemes, says he is going to sue his private bank, Coutts, over his investment in AIG Life, a UK branch of the beleaguered American insurer.


Mills, deputy chairman of London Olympics organising committee, was one of thousands of British investors who put a total of £6 billion in AIG Life’s Enhanced fund, a money-market fund that was promoted as “a low-risk alternative to an instant-access deposit account”.


However, AIG was forced to close in September after fears of the insurer’s collapse caused a run on the fund.


Investors could get back half their investment, but the other half had be locked up for more than three years — with no interest — if they wanted to reclaim it without further loss. If they had cashed in, they would have lost up to 25%.


Mills proposes to issue a writ against Coutts, owned by government-backed Royal Bank of Scotland, within days for “losses as a result of mis-selling, breach of duty of care and breach of fiduciary duty”.


He believes the commissions Coutts earned from AIG on the sale of the fund contributed to the problem. “They were driven by the commission,” he said. “That was not in the best interest of their clients.


“There needs to be a fundamental shift in the way financial services are run and managed if people are to regain any kind of confidence in the system.”


Mills invested in the Enhanced fund through AIG’s Premier Bond last year on the basis that it would preserve his capital. He banked £160m from the sale of LMG, the Nectar business, in 2007 and is believed to have as much as £30m tied up in AIG.


“When I placed my money in this bond, Northern Rock and Bear Stearns had gone bust and the market was already in turmoil. My instruction to Coutts was all about capital preservation and that is one of the reasons I am so angry,” he said.


He also claims Coutts did not act on his doubts about the fund before the run in September. “In 2008, when it became clear AIG was having problems, I wrote to Coutts and said I thought I should move my money into gilts for more security,” he said. “I was told AIG was absolutely fine and that I should keep my money in there. Coutts was still selling the AIG fund weeks before the insurer went under.”


He has asked Coutts to underwrite AIG’s guarantee that he will get his money back in full in three years, although he concedes this would be unusual and it has refused the request.


“I accept that we were reasonably sophisticated investors. I am absolutely aware that prices can go up and they can go down. I have made money and I have lost money, but here I think we have a clear case of mis-selling. Had Coutts not been paid by commission you wonder whether they would have moved clients out of AIG, but it would have meant giving up a large amount of their income.


Coutts said: “We are not aware of any proceedings being issued by Sir Keith. We have not had any contact from him on this matter since January. We do not agree with the assertions made by Sir Keith and have made our position on this matter clear to him. If proceedings are issued they will be vigorously defended.”


Herbert Smith, Coutts’s solicitor, has threatened defamation proceedings over an open letter published by Mills.


It looks like this will be a battle royal.

ENDOWMENTS

Debbie Cox a financial controller from Bristol, only realised that she had been mis-sold a mortgage endowment policy after paying in for 10 years.


She took out the policy in 1989 with the Guardian Royal Exchange after receiving advice from her mortgage provider, Halifax.


She agreed to pay in £20 a month for the first year with a £15 increase in the payment each year for the first five years until it reached £80 a month.


She was promised that this would cover her mortgage in 18 years’ time, and that she would have the option of continuing to pay for another seven years if she wanted a large lump sum at the end of 25 years.


“It seemed like the perfect solution to me,” said Cox, 43.


“I was a single mother at the time, so I insisted I didn’t want to take any risks either.”


Ten years later, she received a call from Guardian warning that her fund would not be sufficient to cover her mortgage. It advised her to increase her contributions to £30 a month for the next 15 years to have any chance of paying off her Halifax debt.


“I sought some advice, and was told not to throw good money after bad, and that I had been mis-sold.


“The advice I received was from a tied adviser and so it wasn’t impartial. The adviser did not explain this to me at the time I took out the policy.”


She complained to the Financial Ombudsman Service, which agreed with her and ordered Guardian to pay her invested money back as well as interest.


Her total payout was around £10,000 — £4,000 of which was interest on her invested capital.

'CAUTIOUS' FUNDS

Valerie Goodall from Lincoln invested her retirement savings of £62,000 in the Legal & General (Barclays) Cautious fund in December 2007 after receiving advice from a Barclays financial planning adviser.


“My husband Bill and I took care to stress that safety and an income of £2,000 a year were our main priorities. We were given the option of this fund and one managed by F&C, but were steered towards the Barclays one.”


In June 2008, Goodall received a statement saying the fund’s value had dropped to £56,229. She rang Barclays to express her concern, about the fund value and the possibility of recession. “I was assured categorically there would be no recession.”


Despite being called a “cautious” fund, it has about two-thirds in investment-grade bonds and a third in riskier shares. Her initial capital is now worth £45,000.


“I’m disappointed that a fund called a cautious fund could lose me so much money so quickly,” said Goodall, 66. She has sent a formal letter of complaint to Barclays and is now planning to lodge a complaint with the Financial Ombudsman Service.


Barclays denies mis-selling or that its adviser rejected the possibility of recession.


PENSIONS


John Armstrong from Bangor, Co Down, 70, has been hit not once, but twice by poor advice. For a number of years he was paying into a Friends Provident pension plan with a guaranteed annuity rate of 10% at age 70 — higher than the 6% or 7% he could have got on the open market.


In 1999, he was advised by a Friends Provident salesman to move into income-drawdown. This would allow him to draw an income from his pension fund, while leaving a certain amount invested in the stock market. The adviser received a commission each time he sold such a product.


He was told the fund would grow by 7% a year, but instead it lost 20%, 15% and 6% in the next three years. He also lost his valuable guarantees. “I felt completely cheated,” he said. “Friends Provident was just awful. It kept on saying I was made aware of all the risks and there was nothing I could do. I was assured that things would be put right but they weren’t.”


In 2002 he went to the Financial Ombudsman Service, which rejected the complaint as he had failed to lodge it within six months of being told by Friends Provident that it would not give him a full payout. The insurer initially offered him £4,000 compensation. He rejected this and later complained, via a solicitor, on the advice of Hargreaves Lansdown. Two years later, just as the case was due in court, he received a six-figure payout.


He wasn’t so lucky the second time. In 2000, he was looking to place two investment Isas, one for himself and one on behalf of his wife, Valerie, into an investment offering some scope for capital growth. An adviser from Anglo Irish Bank recommended a five-year structured product for his £14,000, with claims of “spectacular growth”. When the policy matured in 2005, though, he received only his initial capital back. “I may as well have placed it all in a deposit account,” he said.


He again complained to the FOS, but it ruled against him, saying that the risks had been pointed out in the documentation he received.

NOT SO SAFE


Cautious-managed funds: These are meant to be cautiously managed by investing in a mix of cash, bonds and equities, but have fallen an average of 19% in the past year. Only three out of 124 funds are in positive territory over the past 12 months.


Protected products: These offer investors guarantees on their capital if they tie up their money for a certain time. However, they are linked with an index and the guarantee only applies if this index does not fall below a certain threshold. The guarantee is often underwritten by a separate firm, which is not always made clear.


Money-market funds: Many investors have fled to the safety of funds billed as “near cash” and so not exposed to stock market. However, it is emerging that many have riskier mortgage-backed securities underlying them.


How to complain

The Financial Ombudsman Service (FOS) will deal with an “event” if is brought to its attention six years from the time you believe you were mis-sold the product.


You have another three years if it can be “reasonably argued” that you were only made aware of the problem over this additional period — through unreasonably poor performance of the fund, for example.


You must first make a complaint to the firm, which will have eight weeks on receipt of the complaint to respond.


If it fails to do this you can lodge a complaint with the FOS. If your complaint is rejected, however, you have six months to lodge a complaint to the FOS.


If the FOS fails to help, you can still go to the courts for redress, though it is not free like the FOS — court and solicitors’ fees vary depending on the case.


Courts are also likely to reject claims that are 15 years after the “event”.


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