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Geared Tep clients were not told of risk

The FSA has publicly censured The Garrison Finance Centre Limited for failing to communicate the risks of geared traded endowment policies to their clients, some of whom remortgaged their properties to buy policies.

The FSA has waived the £35,000 fine it would have imposed on the firm because it is in liquidation and any remaining funds are to be used to meet customer claims.

The firm took £165,000 in commission for the 29 geared Tep sales it made over the period covered by the enforcement action. All the sales were made by a single adviser, who is not understood to be subject to enforcement action.

The FSA has instructed the liquidator to write to the firm’s geared Tep customers telling them they may have received unsuitable advice and could be entitled to make a claim.

Several of the firm’s clients remortgaged their properties to take out the geared Tep policies but they were not warned of the risk to their properties through gearing.

Only one of the clients was warned of the possibility that they might have to inject further capital to keep their Teps going.

The FSA found that, in some cases, clients’ attitude to risk was not recorded and in instances where they were, the risk profile was not consistent across all documentation.

In some cases, the recommendation to take out a geared Tep did not match the customer’s risk profile.

Documents sent by Garrison to clients often lacked clear or balanced information to enable clients to make an informed judgement on whether or not to accept the product recommendation.

A review by an external compliance consultant found that all the firm’s Tep sales over the period failed to comply with FSA principles.

FSA director of enforcement and financial crime Margaret Cole says: “Geared traded endowment policies are complex investment products with significant risks attached to them. Garrison failed to make this clear to its customers, so many of them may have received unsuitable advice.

“Advisers currently offering or considering offering complex investment products should look at the details of these cases and act to ensure they are treating their customers fairly. Anything less will result in strong action from the FSA.”

The investigation follows a thematic review of geared Teps conducted by the FSA’s small firms and contact division which began in 2007.

In May this year, the FSA publicly censured Integrity Financial Solutions over Tep advice. In 2008, the regulator fined Knowlden Titlow Financial Services and Derrick Hales Financial Planning for failures relating to the sale of geared traded endowment policies.

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Comments

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  1. The failings on which the FSA has taken action seem reasonable enough, and highlight once again the importance of observing the fundamental processes of providing financial advice ~ a thorough FactFind and (before any application forms are presented for signing) a correspondingly though letter of recommendation. As ever, nearly all complaints are predicated on the statement that if I’d been told x, y & z I wouldn’t have gone ahead. It really isn’t much more complicated than that, despite the never ending boatloads of self-serving consultation papers and regulatory updates pumped out by the FSA, not least on the RDR.

    That aside, the usual questions arise: For how many years were these activities going on before the FSA decided to investigate? For how many years did the firm’s Gabriel returns indicate that it was deriving substantial amounts of commission income from the sale of these types of high risk products?

    Given that for an unknown length of time the firm was generating high levels of commission from the sale of these products but is now in liquidation, it seems unlikely that the present state of affairs developed over just a short period.

    If the answer to both the above questions is several then, in theory (in a just society), any special levy imposed by the FSCS (because the firm is in liquidation and therefore may well be unable to meet its liabilities) should be challengeable on the grounds of regulatory negligence on the part of the FSA.

    The problem, as always, will be finding the money to fund such a challenge.

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