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A Consumer&#39s View

The banning of David Aaron by the FSA must send a shiver down the spines of many in the financial services industry. Nobody would try to defend deliberate misselling but a lifetime ban is a pretty drastic punishment.

The FSA clearly concluded that the offences were very serious and the lifetime ban fires a warning shot across the bows of any IFA who is careless about what is said in promotional material.

As the FSA has stated, the ban relates to the widespread misselling of precipice bonds to some 8,000 customers and it is the first time the FSA has banned a firm for misselling, indicating how seriously it takes the offences.

Much of the FSA&#39s case against David Aaron (Personal Financial Planners) centres on the use of misleading promotional material. In particular, the FSA points to the juxtaposition of supposedly independent risk ratings of various bonds by journalists who had been paid for their reviews and the use of back-testing of performance figures, which is widely used throughout the industry where structured products are concerned.

A major plank of the FSA&#39s case was that the overall impression created by this promotional material was misleading and indicated that the risks involved in these products were less than they actually were.

There were, of course, other breaches of FSA rules by the firm but it is the use of the promotional material which will send anxious IFAs scurrying for a second opinion on their own material Information on backtesting of products is made freely available by many financial services firms and IFAs who use this to promote structured products will, no doubt, be looking carefully at the overall impression that the use of this information, in conjunction with other material, might create.

From 1998 to 2000, when Aaron was promoting precipice bonds and structured products, back-testing would have shown, as quoted in the FSA details of the case, that had the product existed earlier, over the term of the product being promoted, it would not have lost money.

In the event, of course, investors did lose a large proportion of their money and it is for this reason that IFAs should be particularly wary of using back-testing information in promotional material in case it misleads investors into a false sense of security.

While a fall in stockmarkets could have been predicted from, say, 2000 on, it would have needed an especially powerful crystal ball to have predicted that the market would not recover and that the big penalties written into the structure of these early bonds would therefore be triggered.

What the FSA clearly objected to most in the case of David Aaron was the promotional material which undoubtedly misrepresented the risks involved with these particular precipice bonds.

Andrew Procter of the FSA said this is one of the most serious cases of mis-selling that the FSA has investigated and that the problems at the firm were systemic and went to the heart of the way in which the firm operated.

Aaron was a sharp operator, had a high-profile business and was one of the bigger firms promoting precipice bonds. There is no doubt that the complex structure of these precipice bonds made them unsuitable for many of those who invested in them.

In addition, there is no doubt that David Aaron&#39s promotional material was misleading and downplayed the risks.

The journalists concerned may not come out of this very well either although David Aaron was not above commissioning articles for his client newsletters and then altering the copy or using selected quotes out of context.

But the lesson to be learned by all IFAs trying to assess the risks associated with a particular product is that the impossible can happen.

Stockmarkets can go down and stay down and back-testing can produce misleading results.

But most importantly, deliberately misleading investors will not be tolerated by the FSA and will be heavily punished.

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