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Nic Cicutti: Advisers need to do their homework on dodgy investments

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More years ago than I care to remember, when I was a Money Marketing reporter, I rang a Scottish Amicable marketing director for my weekly chat.

Back then, Brendan was ScotAm’s marketing supremo. Softly spoken but incisive, he provided access to the firm’s other senior directors and his views on industry issues were always worth writing about – when he wanted to be on the record, that is. 

As we were having our always unattributable conversation and chewing the fat on various issues, Brendan let slip he thought IFAs and life offices should be prepared to shop each other to the regulator if they felt something was wrong. 

Ahead of the times

His comment made my ears prick up. Back then, the idea of whistleblowing was almost unheard of. If you knew a firm down the road was doing something shabby, you might sigh heavily and then ignore it or gossip about it at your next LIA or Nfifa meeting. What you generally did not do was put in a call to Fimbra or Lautro or SIB, the financial watchdogs of the time.

So I said: “That’s a good story, Brendan. Are you willing for me to use it in the paper?” 

“Let me get back to you on that,” he replied and an hour or so later the call came: ScotAm would be happy for me to run the piece in Money Marketing – and attribute it directly to the company.

I cannot remember where the piece appeared in the paper but it engrained in my mind the fundamental concept that if you think something is wrong, you need to do something about it.

You certainly do not pretend it has nothing to do with you, nor tell yourself that it does not matter how dodgy the underlying product a punter wants to stuff into your wrapper is because you are offering an execution-only service. 

By now, readers may have guessed where I am heading with this column: the report in last week’s Money Marketing that the Financial Ombudsman Service is looking again at a ruling it made against Sipp provider Berkeley Burke.

The ruling concerns an unregulated investment of £24,000 into Sustainable AgroEnergy made into one of its Sipps by a client who was himself introduced by an unregulated agent.

From Berkeley Burke’s perspective, the ombudsman’s ruling is highly unfair. As the Sipp wrap provider, the firm made sure the client signed a form saying he knew this was a high-risk investment and had not received advice on it. Unsurprisingly, the firm feels that when the FOS came calling, waving that piece of paper around should have been enough to see off any claim for redress. 

It seems clear this is a classic example of regulatory tourism by a muppet investor who is now seeking to recover some or all of his lost assets by fastening on the only regulated entity in the whole sorry affair.

I do not necessarily want to argue strongly in the ombudsman’s favour but we should also consider some of the other facts of the case.

The problem is, for any professional reading the marketing blurb for this particular investment, alarm bells should have been clanging.

The dream being peddled by Sustainable AgroEnergy was that of making money by converting the seeds of the jatropha, a small shrub grown on Cambodian plantations, into bio-diesel.

Non-regulated UK-registered companies were offering investors in Sustainable AgroEnergy “massive 345 per cent cash returns over the first five years – up to 93 per cent a year”. 

It also became clear in 2011 that Sipps were being heavily touted as a vehicle for these investments, presumably as a means of maximising tax-free returns.

Alarm bells

But already in February 2010, the Ecologist magazine was quoting experts who said “claims made by the investment companies were highly dubious and conflicted with evidence collated by NGOs”.

In 2011, Friends of the Earth published a report titled, Jatropha: Money doesn’t grow on trees – 10 reasons why jatropha is neither a profitable nor a sustainable investment.

In addition, according to financial journalist Gavin Lumsden who wrote about the affair in 2012: “Auditors PricewaterhouseCoopers [had] raised concerns that Sustainable AgroEnergy would not be able to pay investors and had not maintained appropriate accounts for the year to 31 March 2010.” 

In other words, there was a growing body of evidence in the public domain to suggest Sustainable AgroEnergy was at best a highly dubious investment vehicle and at worst a scam designed to part gullible investors from their cash.

Court case

A trial set to start next month at Southwark Crown Court, in which a number of the company’s associates will be in the dock, will determine which of the two is closer to the truth.

Meanwhile – and regardless of the outcome of the FOS review of its original findings against Berkeley Burke – it occurs to me that the key advice is: if something out there smells fishy, do your homework thoroughly before you stick your snout in the trough.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 23 comments at the moment, we would love to hear your opinion too.

  1. The most important aspect of this affair, with far wider consequences for advisers, is whether consumers should be allowed to be idiots.

    There are health warnings for gamblers, smokers, alcohol enthusiasts.

    Should bookmakers be in trouble when a punter loses his shirt on the 4.15 at Redcar?

    Should newsagents be in the dock because a customer purchased 200 ciggies and suffered lung cancer?

    Should publicans be reprimanded or sanctioned because their customers liver has stopped working?

    At what point is somebody going to say “enough” you are a grown up and if you want to speculate/waste money/drink yourself to death then it’s your unalienable right?

    Once society reaches out and says that we must be saved from ourselves with consequences for anybody that appears to be associated with the ‘bad behaviours’ involved that’s when I want to stop and get off.

  2. I have considerable (often unpleasant) experience of authorised advisers sending me investments to review to see if they were “SIPPable”. In some cases it was abundantly clear that the adviser had undertaken little or no due diligence.

    On the occasions where an investment was knocked back this often resulted in complaints from the adviser who were often at pains to point out that we did not have the authority to question their advice. One or two even threatened to personally sue me for not allowing some investments.

    The problem as I see it (from above experience) us that some advisers are guided by the £ and not whats in the best interests of the clients and these advisers put providers under considerable pressure to accept investment, so did accept them and they are paying the price for it now.

    We have seen a number of these cases but I suspect that this is the tip of a very large iceberg. My personal prediction is that the next can of worms will be unlisted shares bought via SIPPs.

  3. It is abundantly clear to me that by far and away the vast majority of financial advisers do not get involved in this kind of rubbish.

    In fact they go to great lengths to advise their clients to keep away from investments that promise to return “93% per year”. But still of course such good behaviour isn’t worth reporting and the rest of us get tarred by the brush of association “All advisers are greedy and out for themselves”

    I wonder why Nic, and indeed Gordon Sinclair in his response, don’t name names rather than all of us having our collective reputations diminished by these stories?

    Who threatened Gordon with legal action when he rightly rejected an investment, for a SIPP and who is the un-named and unauthorised agent in Nic’s story?

    Pray tell

  4. @Nick Bamford

    Well said. We use SIPP’s often but never to hold anything other than retail investment funds. I can’t imagine a situation where we would allow ourselves to be associated with the type of investment mentioned in Nic’s article. How the hell would i know what Jatropha even is never mind whether or not it’s a good investment? Plus i don’t have the time to find out.

    Having said that i do think Berkeley Burke are getting a raw deal from the FOS. In certain situations investors will like to use their own pension provisions to fund investments that they believe they know enough about to be investing in. The relationship between the non-regulated adviser and the client is a seperate issue. Either the FCS makes it the SIPP providers responsibility to police advisers and their recommendations or the FOS accepts that the SIPP provider doesn’t have that responsibility.

    I for one think that waving a bit of paper around that states we didn’t advice you and you may be making a very risky investment should be enough to get out of trouble with the FOS. Obviously the rules are very different, and rightly so, for advisers.

  5. A Day in 1987 was supposed to stop this, so was 01/01/1995 and many other initiative, then finally RDR.

    Regulation isn’t working, policies are flawed , supervision is poor, the whole of the UK is much the poorer despite the vast expense.

  6. I think Alan has it right !!
    How long (in a lot of cases) do we as an industry/profession have to save clients from themselves ? personally I have lost a good few by not investing their money in investments that I don’t believe appropriate !! (arc cru to name one) my point being is there are no health or wealth warnings on such things and I’m not talking about regulated investments as they come with protection but its the murky waters (beware there may be dragons) of the unregulated stuff so its down to the good to advise as the bad will find a way to profit.

    I cant say I agree with Nick Bamford on his point of naming and shaming ? what next a good old lynching posse yeehaa !!!

    It really has to come from the top, maybe the FCA should concentrate on being a “regulator” instead or some quasi law enforcement agency only acting after the event and always being “behind the curve” (if this is the new buzz word or words)

    Lets face it the FCA have the power to stop this, but keep getting it wrong, the bad keep benefiting, the client (in most cases) keeps be saved from the burning building, and well; the good keep paying !!!

    Sometimes I do wonder if (in a warped sense) its worth transacting this crap ? well I would get paid (for a start) if it went belly up the client gets his money back, and every-one else has to pay the levies ?

    Because this is exactly what is happening !!

  7. The points at issue here seem to be that despite:-

    1. Berkeley Burke having done their level best to inform the client of the very high risks of loss posed by this investment, despite

    2. having made plain that they wouldn’t recommend it and despite

    3. having obtained from the client at least one signed statement confirming that he clearly understood all this and wouldn’t hold BB responsible if it went down the pan,

    From what I’ve heard from another source, the client even claimed to have no recollection of having signed of having signed any disclaimer. In other words, in the hope of getting the FOS to hold BB responsible for his refusal to take note of their warnings and his pig-headed determination to go ahead anyway, he lied. The FOS has chosen to ignore:-

    1. all BB’s efforts to steer the client away from this investment,

    2. to protect him from his own stupidity and

    3. to protect themselves against the possible consequences of him insisting on going ahead anyway.

    BB appears most certainly not to have stuck its nose in any trough, as NC so disparagingly puts it and if the FCA would rule that authorised intermediaries may not take commission on any investments of any sort, this would surely largely remove the temptation on the part of some to recommend or even merely facilitate unsuitable ones.

    The lessons to be learned here appear to be that:-

    1. the FOS is maliciously prejudiced against advisers, even when they’ve advised a client NOT to take a certain course of action,

    2. If a client comes to you wanting to do something you believe he shouldn’t, inform him in writing that he shouldn’t do so and that you’re not prepared to facilitate it even on a non-advised basis and that

    3. if he’s insistent that he wants to do it anyway, notify the SIPP provider PDQ that you no longer act as advisers/agents for that particular scheme. Not only can a firm do without clients like that but they’re better off severing all ties with them as quickly and as decisively as possible.

    I sincerely hope that BB is successful in their legal battle to get the FOS decision overturned.

  8. @ Nick Bamford

    I dont think MM would be too happy about me naming and shaming on what I understand are active cases with the regulator!

  9. @ Nick Bamford

    …and what Gordon tactfully doesn’t say is that naming and shaming people who have threatened to sue you is a pretty strange thing to do, as they have already shown a propensity to sue you.

    What’s the point of naming them and risking being sued? It’s not going to save anyone – everyone who reads this paper knows to avoid rubbish like this, and the people who fall victim to these scamvisers aren’t going to read these comments.

    The most effective form of self-defence is to not get into a fight, even if you think you can win. It applies on the street and it applies in the courts.

  10. “Guilty; off with their heads- all of them”

    NC’s approach is wearisome. “They are IFAs and this case proves my point- they are all tarred with the same dishonest brush”

    Why cannot NC say something that is constructive i.e. propose actions or processes that will help the independent financial services industry and take it to new heights for the benefit of all.

    He has become boring- “keep turning the anti IFA handle, make disparaging remarks even if on flimsy grounds, evince a strong IFA response and I have done my job” ( and I will keep my job).

    It would of help if he extolled the enormously good work undertaken and delivered by a very high percentage of all IFAs. Has he canvassed IFAs regarding the number of thank you letters, often in most glowing terms, received from grateful clients. We had two this very morning. I am quite sure such an approach will be very revealing and if he is a fair man he will acknowledge our worth in and to society

    Sadly, perspective is often lacking in his MM contributions.

  11. @ Nick Bamford: while I would love to be able to claim that the information in this column was obtained following a huge volume of research taking days and days of my time, the identity of the introducer and all other information (as well as a lot of info that was not used) was available by the simple expedient of a quick Google search. Any half-diligent IFA could do the same. That includes Berkeley Berry. Go and have a look.

    @ Julian Stevens: A few weeks ago I was asked to speak at an “investment seminar”. The fee ran into 4 figures. I was promised complete control over what I said and that I could state clearly my non-involvement in the product being touted. I did my research and decided that I did not want my name associated – even tangentially – with a company and a product about whom I was not 100% certain.

    If I had gone and the product were to turn out as I suspect it will, having collected a fee I would not be able to defend myself against accusations that I stuck my snout in the trough. The same applies to your chums at Berkeley Berry. Ironically, if they had listened to your advice above they would not be in the mess they are.

  12. FOA moderator of this thread: could you please amend Berkeley Berry to Berkeley Burke? Many thanks.

  13. No one is question how an adviser is able to do sufficient due diligence.

    Historically when it all goes wrong the rating agencies forecasts, statements and rating are not worth a thing. We avoided Arch Cru only because at a meeting they confirmed they valued their own security to us, which range alarm bells.

    The issue is that any adviser does not have either the resources, time or sufficient power to interview every fund manager, visit the company, see the operation and have, and this is the most important, the access to the actual assets currently held.

    What is the point of paying for regulation, when the regulator effectively regulates very little. The regulator should be accountable if they give regulatory approval to a fund. The managers, accountants, rating agencies should be held accountable, which is more likely to happen if they personally have to foot the bill..

    By all means report any worries, but surely the regulator, the managers, accountants and rating agencies are being paid a lot of money for the adviser to be able to TRUST what they state.

    It seems to me that the adviser at the coal face is being unfairly blamed by those who can and have deflected their own failings, whilst earning billions of pounds.

  14. NC @1242

    Would NC care to know the doubtful product he so honestly avoided ?. It will help us with our “dodgy investments” education

  15. wingco @ 1.14

    delete “know” , insert “name”

  16. I don’t KNOW the product is dodgy, I just don’t want to be associated with it. For what it’s worth, it is an unregulated product marketed by an unregulated business. Time will tell if I’m wrong. Either way, it doesn’t matter. You have to both DYOR and make up YOUR mind about products you recommend or are associated with – and accept the consequences that go with it.

  17. @DH I don’t want them “lynched” either I think we should save that action for anonymous posters on sites like this! 🙂

  18. My first encounter with the Brandeaux property funds was when I met a client holding them in an offshore Bond who was seeking advice… this was well before they hit their problems.

    When directly asked, the provider stated that they were UK regulated funds and – specifcially – not UCIS….

    Whilst I do feel that clients can, in some cases, be over protected when they knowingly wanted to take risks .. it’s says a lot when a leading UK On/offshore bond provider gets it wrong.

    My simpathy is with BB if, as outlined above, they went through multiple steps to ensure the client was made aware of the many risks….

  19. NC ~ I have no “chums” at BB and the only reason the company is now having to take its case to court is that the FOS decided to ignore what the client signed confirming that he’d received no advice (other than that the scheme probably wasn’t a good idea) and that BB would be in no way accountable if it came apart at the seams and went down in flames.

  20. Julian: I referred to them as “chums” of yours because you seem to have an intimate knowledge of all the compliance steps they took prior to setting up this Sipp.

    I’ve made it clear in my article that I don’t have a lot of sympathy for this investor. I also have not made any comment in respect of the FOS’s decision to take on the complaint and find against BB. It’s a very unusual case.

    My key point is that had BB carried out the most elementary research they would have discovered that the underlying investment destined for their Sipp was a stinker. They could then have avoided all of this by declining to take his money.

    Maybe they did the research and thought they would be protected because, after all, whatever happened to his money they had got the punter’s signature on a slip of paper, allowing them to pocket the cash to manage his Sipp. Big mistake: it suggests the investor was not the only muppet in the overall process.

  21. @Nic

    I understand your point but where is the line drawn? Should SIPP, ISA, Bond or other product providers start to question the funds that investors are utilising within their products? In my opinion the line is most clearly drawn when stating we’re a provider not an adviser. If the rules allow the type of investment to be utilised then the provider shouldn’t police the potential of the investment.

    Product Provider = Facilitates the investment
    Adviser = Decides whether the investment is appropriate

    Just my humble opinion as usual.

  22. I may be missing something here, but surely if a firm knows enough about a fund that they will go to such lengths so as not to be held accountable for it then they really should be ‘advising’ the customer to stay well clear and it is irresponsible in our role as a professional to allow the investor to stick their money in.

    The message I take from this is that we are happy to take your money for transacting this business even though we know your are exposing yourself to the risk of losing the lot…please sign here.

    DH | 18 September 2014 10:12 am states that he has lost business in the past – ”personally I have lost a good few by not investing their money in investments that I don’t believe appropriate !! (arc cru to name one)” – that to me is how an adviser should be acting when they do not have faith in a fund regardless of how many pieces of paper you get the client to sign it can never be right to allow them to use your good name to invest in a poor fund – unless you are prepared to take the hit for an easy payday.

  23. Nick Wardle makes the most sensible point.

    Transaction facilitators are just that. It is bot within their remit to question the instruction given unless it is illegal.

    Consumers can be idiots and are allowed to be. God knows many of them get elected for heavens sake.

    Perhaps this highlights the futility of regulators jumbling the definitions until black becomes grey and the shade of grey is determined by the FOS.

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