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Precipice precedents

Paul McMillan looks at past cases to assess how successful the FSCS is likely to be in reclaiming compensation for precipice bond misselling from providers.

The FSCS has paid out around £30m compensation to investors as a result of adviser firms found guilty of precipice bond misselling going into default.

In the last month, it has sent out letters to various providers informing them it is looking to take action to recover this money.

An FSCS spokeswoman says: “While we cannot comment on specific recovery actions, we can confirm that we are pursuing recoveries in relation to compensation payments made for the misselling of precipice bonds. We seek to make recoveries where we consider it reasonable to do so, to reduce the cost to levy payers of compensation payments made by the FSCS.”

If the FSCS is successful, it would be good news for advisers who could see a reduction in their levy burden. It would also have implications for future claims in this area.

But one lawyer involved in the dispute, who wishes to remain anonymous, suggests it is going to be very hard for the FSCS to prove provider responsibility for misselling and suggests the liabilities lie squarely with the adviser and, if they go into default, the compensation scheme.

The lawyer says: “It is the duty of the adviser to understand the product details, if the product is appropriate for the client and to advise carefully how much to invest in it. The FSCS will have an uphill struggle proving provider responsibility.”

A spokesman at a provider involved in selling precipice bonds at the time when widespread misselling took place is confident about having a successful defence against the FSCS’s claims.

“The issue is one of responsibility for how the consumer gained understanding about the product and the risks of the product. We had an open dialogue with the FSA at the time to ensure all our marketing material was correct and not misleading,” says the spokesman.

Although the FSA could not officially rubber stamp the material, the spokesman says the provider was given a good enough indication that the regulator was happy with the material and this will form a substantial part of the provider’s defence.

In the high-profile case of adviser firm David Aaron Partnership, which was banned after being found guilty of precipice bond misselling, evidence from the FSA praising the firm’s marketing material was considered irrelevant by the regulator.

A letter to David Aaron from the FSA, dated November 22, 2002 and falling in the period in which he was found guilty of misselling, praised the firm’s precipice bond marketing material for being “generally well designed and written and therefore useful to consumers”.

In September 2004, Aaron was banned for the widespread misselling of precipice bonds between 1998 and 2003, after an FSA investigation revealed that the firm had issued misleading adverts and financial promotions which downplayed the risks and contained unsuitable recommendations.

Compliance consultant Adam Samuel says it is of no consequence that the FSA may have indicated that the provider material was compliant as the regulator cannot bind itself and certainly cannot bind the FSCS, consumers or the courts when expressing an opinion about a document.

The spokesman at the precipice bond provider says the firm spent a huge amount of money with its own legal firms to ensure the products were presented in an appropriate fashion.

The question of liability will come down to whether marketing material produced by providers meant that advisers could not properly advise their clients and so contributed to the missale.

Samuel says: “My personal experience of reading some of the precipice bond material issued by providers was it did not give a balanced picture of the product and, in particular, the risk that if the relevant index dipped below a certain point, the investors losses would be double those of the index.”

He says the FSCS has good grounds to make its case but it will be going up against some “large beasts in the jungle” who may refuse to be intimidated.

Samuel says: “A quiet settlement seems a likely outcome once the sabre rattling finishes. Much may depend on the FSCS keeping its nerve.”

He points to a precedent where West Bromwich Building Society paid a considerable amount of compensation to the FSCS’s predecessor, the Investors Compensation Scheme, for its role in the original home income plan scandal, despite the lender arguing that it only provided the product.

Another important precedent is the Seymour versus Ockwell case where provider Zurich IFA was found two-thirds responsible for a client’s losses from an offshore fund after its defence that it gave no advice so no liability accrues was rejected.

Intersolve actuary Mark Barge, who originally helped design precipice bonds, says looking back at some of the literature from providers at the time, it is possible to pick out elements that were misleading and led to the adviser not being given the appropriate information to advise the client.

Barge says if the FSCS can provide evidence that advisers did not have the capacity to explain the product properly to the clients, it has a chance of getting at least some of the money back.

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