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Lehman terms

The regulator’s review into Lehman-backed structured products has seen two firms go into administration

Structured product providers NDF Administration and Defined Returns Limited have been forced into administration in the FSA’s first clampdown since the start of its review into Lehman-backed products.

Last week, the FSA said the two interlinked firms had been placed in administration following a review into their systems and controls and marketing literature.

The firms have a total of 35,000 customers and around 10 per cent of those have invested in Lehman Brothers-backed structured products. NDFA has over £30m of investors’ money in Lehman-backed plans.

The firms have been declared in default with the Financial Services Compensation Scheme and the FSA says investors may be entitled to compensation under the scheme.

Grant Thornton partners Andrew Hosking and Martin Ellis have been appointed joint administrators of the firms. They say they are committed to working with the FSA, the FSCS and other bodies to help protect the interests of investors and creditors as well as the assets of NDFA and DRL.

Hosking says the first priority is to confirm that investor funds have been segregated from those NDFA and DRL corporate funds. He says: “Based on the limited current information we have seen to date, we understand this to be the case but we need to verify this.”

Grant Thornton is trying to sell the businesses and assets but until it has concluded its review, income on all plans will be frozen and clients will not be allowed to redeem their investments. Last week, it said operations had been suspended but were being kept fully staffed.

It is writing to all affected investors to outline their options but has warned that its review could result in some delay to income payments or repayment of capital on maturing investment products in the short term.

Third-party administrator Opal, which has provided services to NDFA for 10 years, says its work for NDFA represented between 6 and 10 per cent of its total business. The two firms share the same premises along with DRL in Hertfordshire but are separate legal entities. Opal has agreed to continue to administer NDFA plans into the new year.

Royal Bank of Scotland is seeking assurances on four structured products which are administrated by NDFA.

NDFA has sold over £1.6bn of investments and since 1999 has launched over 150 structured investments. It was set up in 1985, dealing in structured products and Isa mortgages under its own brand. DRL was set up by the firm to administer plans that were directly run by Lehman Brothers.

In September 2008, following the collapse of the investment bank, NDFA and DRL warned investors in their Lehman-backed structured products that they should prepare themselves for “substantial” losses.

With Keydata having happened and with issues still ongoing, we need to make it clear to clients that this is going to be a different scenario and should be a lot smoother. It is a case of making sure any clients in NDFA plans that are due to mature this month or next do mature and that Opal can administer those fairly quickly

On May 6 this year, Conservative MP for Wantage and Didcot Ed Vaizey tabled an early day motion to urge the FSA to conduct a rapid and detailed investigation into the marketing of Lehman-backed structured products.

A day later, the regulator announced it would actively look at the wider issues raised in the structured product market following the collapse of Lehman Brothers under the wider implications’ process.

Last month, the FSA said it would be taking action against firms which sold Lehman-backed products after uncovering “serious issues” in its review. It said it would report further on the outcomes of its review later in October but has given the Financial Ombudsman Service the go-ahead to review individual complaints relating to the products.

In September, the ombudsman said it had received 160 complaints but it is estimated that £200m was invested by around 6,000 people in Lehman-backed savings products. Complaints that were being considered by the ombudsman at the time that NDFA and DRL went into administration will be transferred to and considered by the FSCS.

The FSCS expects to process the majority of claims within six months of receiving them. Its initial findings are that at least some of the marketing materials used by the firms do not comply with their regulatory obligations and may give rise to valid claims.

Structured products from Meteor, Arc and Legal & General are also among those affected by Lehman’s collapse. Following the news of NDFA and DRL’s administration, structured product provider Meteor confirmed that it had assisted the FSA in its review earlier in the year but said it has since had no further contact. Arc Capital & Income says it has held discussions with the FSA and is continuing to offer new products while dealing with the issues that the FSA raised.

Advisers have reassured investors that the administration of NDFA and DRL is unlikely to lead to a repeat of the Key- data debacle.

AWD Chase de Vere senior manager Jason Walker says: “With Keydata having happened and with issues still ongoing, we need to make it clear to clients that this is going to be a different scenario and should be a lot smoother. It is a case of making sure that any clients in NDFA plans that are due to mature this month or next month do mature and that Opal can administer those fairly quickly.”

Walker says the firm has its eye on other structured product providers which had exposure to Lehman Brothers and expects news to be more forth- coming from the FSA because of public concern.

In the meantime, Lowes Financial Management managing director Ian Lowes has warned investors who hold Lehman-backed plans via NDFA or through other providers not to assume any compensation claim submitted will definitely pay out.


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