Case Studies
What is a structured product?
Nov 2010: Daily Mail - Don't be tempted by FTSE-bonds
Oct 2011: Daily Telegraph - market-linked bonds
2011: How Complex Derivative Products Imperil Seniors’ Retirement Security
Lehman-backed structured product failures - 2008
In the run-up to the collapse of Lehman Brothers three years ago, billions of dollars of Lehman debt were packaged as structured products to look like simple, stock-market related, savings plans. Four UK promoters (NDF Administration, Defined Returns Limited, ARC Capital & Income and Meteor Asset Management) sold £107m of these products to nearly 6000 high street savers. Some UK private banks sold similar products to their clients too.
When Lehman collapsed in September 2008, the products became worthless. The Financial Services Authority investigated, and reported widespread mis-selling. NDFA, DRL and ARC ceased trading in 2009, with mis-selling liabilities.
 |
In 2008, Bill and Jane Robinson from Kent,
both pensioners, invested £55,000 in the NDFA Fixed Income
or Growth Plan after receiving an "invitation to buy"
letter from NDF Administration. The letter stated that the ONLY risk
to their capital would be a significant fall in the FTSE 100 and EUROSTOXX
indices. As cautious investors, the Robinsons saw the plan as a low risk opportunity to generate income in their retirement. They knew nothing of Lehman's involvement, as the bank was not mentioned in the brochure. The Robinsons' mis-selling claim has been turned down by the Financial Services Compensation Scheme (FSCS). |
 |
Patricia
Ryan, 53, a florist from Cornwall, invested her ISA in the NDF Fixed
Income Plan in Summer 2008. The income was needed to supplement
her husband's pension following his enforced early retirement at age
50. Six weeks after investing, the money was gone. "I trusted everything
I read in the brochure, primarily because they were regulated by FSA."
said Mrs Ryan. Three years after investing, FSCS has compensated Mrs Ryan. "It should never have reached this stage. The regulator should have stopped this happening in the first place. Many others with the same product don't know they can claim, especially older people without internet access. It can't be right that these people lose out. I have totally lost faith in all financial institutions and authorities in this country." |
 |
James Byles from Portsmouth invested £20,000
in the Defined Returns Limited (DRL) Kickout Plan in mid 2008.
The plan was supposed to return 12% for each year that the FTSE index
remained below its starting point. The only circumstance in which
he would lose his money, James was told, was if he encashed early,
or if the FTSE index were to fall by more than 50%. Lehman collapsed
within weeks and his money was gone.
FSCS announced that they were satisfied with the marketing materials for James' plan and for other similar products, despite the FSA's findings that the plans had been mis-sold. James insisted on his right to claim, and in July 2011 FSCS accepted that DRL had mis-represented the plan to James and compensated him on behalf of the failed company. Others with the same Defined Returns Limited Kickout Plan have been denied compensation. |
 |
In 2008, Sally Phillips invested £14,000 in
a structured product through an Isa with NDF Administration. Unbeknown
to her, the plan was backed by Lehman Brothers. It was only after
Lehman went bust in 2008 that she learnt of its involvement and that
she would lose all her money. "I've lost my son's university
fees. FSCS has compensated others with the same product, but has declined
my claim" says Sally, 42, a bat ecology consultant from Cumbria.
She says that she understood the risk of stock market volatility, but does not believe that she was warned clearly enough that she could lose all her money if the counter-party, Lehman, failed. The brochure did not name the counter-party, but said that it was a highly rated investment bank. Sally's request for compensation has been rejected by FSCS. "We will have to borrow the money for Yens’s university education now.” Sunday Times 1 May 2011 |
 |
In 2008, Linda and Phil Smith invested £60,000
in the NDF Fixed Income Plan, backed by Lehman. The plan became
worthless when Lehman collapsed. The Smiths complained about the IFA's
advice and the complaint was upheld by the FOS adjudicator. In the
meanwhile, the IFA's umbrella regulatory firm (Clarkson Hill) ceased
trading and the Smith's case collapsed. The Smiths then made a successful
claim to FSCS which paid out on behalf of the collapsed firm."
Citywire 2 February 2011 |
 |
In 2008, retired couple Belinda and Martin Platt
invested £30,000 in an NDF Administration Fixed Income Plan.
They needed an income to supplement their small pension. The money
was freed up from their home. The salesmen explained they could lose
some money if the stock market dropped by more than half over five
years. What wasn`t made clear was that their savings would be wiped
out if the counterparty (Lehman) - went bust. They lost their money
when Lehman subsequently collapsed.
The income was a lifeline to Mrs Platt. 76, and her husband, 84, who suffers from arthritis and dementia. ‘We have had to cut back on heating.‘ says Mrs Platt, from Gwynedd. North Wales. ‘And I can't afford to get in any help. We've always lived a frugal lifestyle, but losing this money has been a real blow Daily Mail 23 Feb 2011 |
 |
Stephanie Lyons, 55, and her husband Tony Leather, from
Sussex, each invested £3,000 in the NDFA June 2008 Fixed Income
ISA. Both are working on voluntary projects in conservation and education.
With little paid work, they expected the £50 monthly income to help
supplement their low earnings. They lost their money when Lehman collapsed. They were compensated by FSCS after complaining that they were misled by the product brochure. Amongst other things, the brochure claimed the counterparty had an A+ credit rating on 3 June, which was wrong. "The issues are far wider than the counterparty rating" said Stephanie. "If we had been told the counterparty was an American bank, that it was Lehman, that the credit outlook was downgraded in February, and that the rating was downgraded in June, we could have made our own decisions. Instead, like others, we fell in to the trap of thinking NDFA knew what they were doing!" "We do not consider the case closed until all victims are compensated" Citywire April 11 |
 |
In Summer 2008, Mark Everett and his wife Judith
invested £150,000 of their pension in the Defined Returns
Limited (DRL) Kickout Plan. The plan was FTSE 100-linked, would
grow at 12pc a year, and promised "100pc capital return"
if the investor remained invested until the end of the term. Three
weeks later, Lehman collapsed and the investment was gone.
"After the initial shock I thought, it will be OK, we'll be able to make a claim to the FSCS." The plan literature suggested FSCS cover. DRL collapsed in October 2009 with mis-selling liabilities, and FSCS kept investors waiting a further year before accepting claim submissions. Despite others with the same product being compensated, the Everetts had their claim rejected four times. FSCS finally sent them their cheque in August 2011. "This was a bureaucratic nightmare and has been two years of grief" says Mark Everett. |
 |
In
2008, Ramon Modiano invested much of his life savings in the
DRL Enhanced Returns plan. His investment was higher than the
FSCS limit but lower than the FOS limit. Both the FSCS and the FOS
awarded in Ramon's favour, and the IFA was ordered to pay the full
amount so that FSCS would be reimbursed. A 13 month battle ensued
as the IFA refused to pay the full award, and as FOS did not have
the necessary power of enforcement. Happily for Ramon, the matter
has now been settled in full.
|
|
FSCS announced in December 2009 that they would accept
compensation claims for 'Capital Secure' Lehman plans (those where
the capital security was not linked to stock-market performance) from
NDFA, DRL and ARC which entered into administration in October 2009.
According to FSCS figures, 1750 claims were expected in the 'capital
secure' category, and as of June 2010, 1288 had been processed with
an average compensation offer of £15,841. This amounts to £28m
for the 1750 claims, leaving up to £50m remaining uncompensated
for others with SCARPs from NDFA, DRL and ARC.
|
 |
In February 2010, RSM Tenon was fined £700,000
by the Financial Services Authority for failings relating to Lehman-backed
structured product sales. The FSA said that Tenon, which provides
financial advice to high-net worth individuals, failed to properly
"assess" the risks of the investment vehicles. The firm's
risk management systems for its structured products and pensions-switching
businesses were found also to be at fault. They "failed to prevent
or minimise the risk of unsuitable sales," the FSA said. Source:
FSA
|
 |
In October 2011, Credit Suisse was fined £5.95
million by the Financial Services Authority (FSA) for mis-selling
structured products to its UK customers between January 2007 and December
2009. Customers invested over £1 billion and suffered capital
losses estimated at £198.2 million. The FSA said that Credit
Suisse’s private bank failed to make sure that the investment
product was suitable for customers and failed to monitor staff to
ensure they took reasonable care when giving advice. Source FSA
|
Keydata Bonds 2005-2010
In 2005, UK company Keydata Investment Services sold structured products to ISA savers backed by a Luxembourg firm SLS as counterparty, and secured on US life policies. The products offered a fixed rate of return over the chosen period, at a better rate than was then available from banks and building societies. They were supposedly low risk, but the return of capital was not guaranteed. Later that year law firm Norton Rose advised that the marketing literature did not meet FSA requirements. KPMG & HSBC also complained that their names had been used inappropriately in the marketing literature. SLS subsequently defaulted in October 2008 with £103 million of investors’ money.
In 2006, Keydata issued similar bonds backed by its own special purpose Luxembourg firm Lifemark as counterparty, also secured on life policies. Thousands of mainly elderly Britons invested around £350 million. In January 2010, Lifemark got into cashflow difficulties and no further income was paid. The money was needed to pay premiums on the life policies which would otherwise become worthless.
 |
Some versions of Keydata's Lifemark-backed products
were 'white labelled' and sold with third party brand names, including
Norwich & Peterborough Building Society.
Norwich & Peterborough agreed to compensate 3,200 savers with “ex gratia” payments at a cost of £57m, more than 10 times its 2010 pre-tax profit of £5.1m. Gordon Horsfield, Chairman, said that the Society did not admit liability for mis-selling. |
Keydata also sold £2 million of Income Property Bonds to 240 investors. The bonds were issued by a Luxembourg firm called Hometrak S.A. which then invested with a US property developer into two apartment blocks in Maryland and Florida. The buildings went into negative equity, and the banks foreclosed in July 2008. The plans failed.
HMRC determined in May 2009 that some Keydata bonds had not been properly ISA-qualifying and in July 2009 the FSA forced Keydata into closure with £5m in tax liabilities for which it had insufficient cash. 30,000 UK investors were left facing the loss of £450m. FSCS divided Keydata savers into five categories, with some eligible for compensation, and others not. FSCS has paid out more than £200m so far.
Precipice Bonds (SCARPS) 1997-2003
Some £7.4bn was invested in retail structured products from 1997 to 2003. An industry-wide mis-selling scandal broke when thousands of savers lost money as stock market indices fell. The FSA investigated, IFAs went out of business and FSCS paid compensation on their behalf.
Eurolife / NVesta's Blue Chip Plus Plan for example, aimed to return 10.5% a year for three years. Capital would be returned only if each of the top 10 FTSE companies was worth, at the end of the three years, at least 80 per cent of its share price at the start. Savers ended up with heavy losses. By 2003/4, two of Nvesta's bonds were due to mature. One needed the FTSE100 to climb 47 per cent if savers were to get all of their capital back, the other needed the Eurostoxx index to rise 103 per cent.
Investors in NDFA's Extra Income & Growth Plan 3, which matured in October 2003, lost 81 per cent of their original investment. NDFA used Abbey National Treasury Services (ANTS) as the counterparty and marketed the products through IFAs exclusively. IFAs were found to have mis-sold these products and FSCS stepped in to pay £21.5m in compensation to 1800 holders of NDFA SCARPs on behalf of those IFAs who had ceased trading. The backbench committee investigating heard how use of the Abbey National name had given credibility to some promotions where savers had lost heavily. According to Money Marketing 1 June 2000, NDFA had described itself as "an independent but wholly owned subsidiary of Abbey National".
In June 2008, FSCS commenced actions against Abbey National Treasury Services (ANTS) and NDFA to recover the £21.5m . FSCS alleged that ANTS had collaborated with NDFA in product development and promotion of SCARPs and was liable in negligence and misrepresentation to savers whose claims it held as assignee. ANTS contested that FSCS did not have the power to take assignment of saver claims and pleaded that the plans and promotional material had been issued by NDFA, and that as a wholesale institution ANTS had not given investment advice to retail savers or issued promotional material.
|
Retired maths teacher Allen, 65, from Yorkshire invested
in the Eurolife / NVesta bond linked to the Eurostoxx 50 index following
a mail-shot from an IFA group. The IFA sold 11,000 high-income precipice
bonds. Savers could lose 2% of their capital for each 1% drop in the
index. Allen lost more than £7,900. His IFA went into administration
and the case, with thousands of others, was paid by FSCS.
He went on to invest in a Capital Secure bond. Allen, 65, from Halifax in Yorkshire said: 'I am much happier with this new investment because my capital is protected and I will see 101% of any rise in the FTSE 100 over the next six years.' (Presumably unaware that the capital security of his new product also relied upon the ongoing viability of a counterparty bank). Source: This is Money Feb 2004 |
 |
Chris, a driving instructor, and his wife Sophie,
invested a substantial sum in a Eurolife Income Plan after receiving
a mail-shot from a Buckinghamshire financial adviser. 'I was looking
for a safe and cautious investment and this bond seemed to fit the
bill,' he told This
Is Money. The plan paid 10% annual income for three years and
the mail-shot said this was a lower-risk investment.
But savers' money was exposed to European shares. Chris, from West Sussex, said: 'Markets tumbled and at the end of three years our capital was virtually wiped out.' The IFA went into administration. FSCS agreed the plan was mis-sold, and repaid Chris |
 |
Income investors in the New Direction Finance (NDF)
Extra Income & Growth Plan 3, which matured in October 2003, lost
81 per cent of their original investment. The plan was linked to the
Eurostoxx 50 index, but had punishing terms if the index failed to
perform. The Eurostoxx 50 fell sharply during the three year term
of the bond, to around 2,476 having started at above 5,000. Income
of 10.25 per cent per annum was paid, but at substantial cost to capital.
Source Telegraph:
October 2003
|
 |
In April 2007, the Sesame IFA support network was fined £330,000 by the FSA for incorrectly rejecting £5.9m of precipice bond complaints from 350 customers between March 2003 and October 2004. Sesame owns approximately 30% of NDFA, Defined Returns Limited, OPAL and Synergy.Citywire April 2007 |
 |
Michael Ungemuth and his wife Joan, from Hayes, Kent,
bought a Scottish Life International Income & Growth Bonus Bond
in 2000. But the £10,000 they invested was worth little more
than £1,500 when the bond matured three years later. The brochure
claimed they would get a guaranteed income at low risk. Their bond
was tied, in part, to the Euro Stoxx 50 index which then declined
by nearly 40%. The stock market only needed to fall by just over a
quarter to trigger large falls in SLI income bond values.
The Ungemuths complained to the Financial Ombudsman about the advice, but the case failed because the headlines on the brochure's opening page did not amount to advice and the literature warned about capital not being guaranteed. Source: The Guardian May 2004 |
 |
In December 2003, IFA Chase de Vere was fined £165,000
by the FSA for a "misleading precipice and high income bond promotion".
Chase de Vere offered two "cocktail funds" of unit trusts
and two NDF precipice bonds. The FSA found: "The promotion was
not 'clear, fair and not misleading' as significant risk factors were
not given due prominence." The FSA also found the promotion did
not "include clear and balanced descriptions of the investment
and fair disclosure of the risks involved". The FSA found that
the leaflet contained "defects" which had "previously
been identified and criticised" by the FSA in earlier promotions.
Chase de Vere disputed these prior FSA warnings but agreed to remedial
action. Source: The
Guardian Dec 2003
|
 |
Robert Theobald, 54, from Ashford, Kent visited his
local Lloyds TSB branch in June 2001 to deposit a cheque. The adviser
suggested an Extra Income & Growth plan. "I had never invested
in the stock market but the so-called adviser told me I was entering
the market at a low point so it can only really go up. I believed
it because I trusted the bank. I did not understand the maths but
few could" he says.
He invested £30,000 in the plan. His savings slumped. In September 2003, the Ombudsman ordered Lloyds TSB to refund the £30,000 plus interest. Lloyds TSB, was the biggest seller of high street precipice bonds with about 73,000 plans sold through its branches, and was fined nearly £2 million by the FSA. It is also paid £98 million in compensation to some 22,500 people who were mis-sold the policies. Source: The Guardian Sept 2003 / Telegraph: October 2003 |
Eurolife / NVesta capital secure bonds - 1999
In 1999, Eurolife marketed a Capital Secure bond through IFAs which raised £15m from 2,300 savers. The bond offered 6.5 per cent income for five and a half years or 40 per cent growth, in each case with capital protection. The only circumstance where they might receive less, savers were told, was if they wanted to encash early. However, the small print showed that the bond was secured on Eurolife Capital Funding (ECF), a Eurolife subsidiary. ECF bonds were not quoted on any stock market nor were they rated for investment purposes. ECF then lent the money to other companies in the Eurolife group.
Just before the bonds were due to mature in 2005, Graham Devile (at that time director of the Eurolife / NVesta structured product business) informed savers that there were insufficient funds. Mr Devile is reported as saying: “Our staff and our company was not in existence when this bond was sold" Source: Money Marketing. Savers were offered a compromise which would return 60 per cent of their money over the next five and a half years.
Savers voted narrowly in favour of the compromise but the group was still unable to pay back savers and went into administration just 18 months later. There was no FSCS cover for the Eurolife bond failure and IFAs were left to bear the brunt of claims on the grounds of mis-advice
|
Herbie, from Huddersfield, was 75 when he invested
£7,000 in the Eurolife / NVesta capital secure bond in
1999. The bond raised £15m from 2,300 savers. The only circumstance
where they might receive less, savers were told, was if they wanted
to encash early. However, the small print showed that the bond was
secured on Eurolife Capital Funding (ECF), a Eurolife subsidiary.
ECF bonds were not quoted on any stock market nor were they rated
for investment purposes. ECF then lent the money to other companies
in the Eurolife group.
As the bonds were due to mature, savers were told there were insufficient funds. His wife also invested £7,000 but she died during the plan's term, triggering an early payout. Source: This is Money: February 2005. |
|
Most savers who invested in the Eurolife / NVesta
capital secure bond were elderly. Savers were given less than a month
to decide whether to accept a compromise and get back some of his
money.
Another saver, Alma, Alma, an operations manager for a computer software firm, from Essex, said: 'We've been duped.' Along with her father who had since died, and mother, Myrtle, who was then aged 83. Alma invested £7,000 in the bond. 'How the directors can justify taking such massive pay while reneging on the promises made to savers is beyond me,' she says. 'We bought the bond because of the security it offered'. Source: This is Money: January 2005 |