missoldinvestments.co.uk

Lehman-backed savings plans failed in Sept 2008

Sold by NDFA, DRL, ARC, Meteor, IFAs, wealth managers and UK banks

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.

How were the products mis-sold?

Mark Hoban - Financial Secretary to the Treasury - Oct 2010 : "The UK Financial Services Authority found serious advice failings on Lehman-backed products in most of the firms sampled, as well as serious deficiencies in the marketing literature"

"Mis-representation by plan managers" - FSA

In 2009, the FSA reviewed 56 structured product promotions including 13 offered in the run up to Lehman's collapse. Three of the four Lehman-backed plan managers (NDFA, DRL and ARC) were subsequently taken into administration with contingent mis-selling liabilities of £65m.

According to the FSA:
• In one third of cases, promotions failed to explain clearly the risk of capital loss
• Many promotions made prominent claims that investments were 'secure', ' safe', ‘protected’ or ‘guaranteed’ and obscured important risk warnings, using double-negatives or misleading language
• Half of the promotions were ineffective at explaining counterparty risk in a fair and accurate manner
• Very few promotions put the counterparty credit rating into context
• One fifth of promotions did not give the counterparty credit rating at all
• Promotions did not make adequately clear the circumstances in which FSCS would not apply

Meteor were not found to have mis-sold in the FSA 2009 review, but have since been judged by the Financial Ombudsman Service (FOS) to have mis-represented the credit rating of one of the products bought by a couple in Lancashire. The findings could well apply to other products from Meteor, DRL and NDFA marketed at the same time. Meteor denied liability but is reported to have settled the couple's complaint by private arrangement.

"Widespread mis-advice by intermediaries" - FSA

The FSA's sample of 157 advised sales assessed just 31% as 'suitable' with 'significant levels of unsuitable advice' in nine of the 11 firms audited. High profile fines followed, some firms settled informally with clients and 800 firms were given self-assessment kits to decide for themselves whether their sales had been properly advised.

According to the FSA, errant firms:
• Did not adequately train their advisers to understand the products
• Did not match the savers' attitudes to risk
• Placed too many eggs in one basket
• Did not adequately explain the risks
• Did not have the necessary compliance controls in place

RSM Tenon

In February 2010, RSM Tenon was fined £700,000 by the Financial Services Authority (FSA). 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. Read more

Not delivering what was specified in the marketing materials

In November 2010, following a complaint from a couple in Lancashire, the Financial Ombudsman ruled that Meteor should pay redress to a couple who invested in the Meteor Prima Growth Plan issue 7. The product brochure did not name the counterparty but promised a credit rating of "Standard & Poors 'A+' or equivalent". Meteor invested the money with Lehman Brothers which had a lower credit rating than promised. Three months later, Lehman collapsed and the couple lost their money.

Meteor argued that the difference in credit rating would not have affected the couple’s decision to invest. The Ombudsman confirmed his ruling in February 2011 saying "Meteor was in possession of information which it did not share with potential savers I consider it reasonable to say that this information may have led Mr and Mrs X, or any prudent saver, to question the security of the product they were proposing to invest in". Meteor applied in May 2011 for a judicial review of the ruling but then withdrew the application and settled privately with the couple concerned, according to press reports.

Other plans that went live around the same time with Lehman bonds rated at S&P 'A', having promised higher credit ratings in the brochure, include: Meteor Prima Plus 2 , Meteor Prima Plus Protected, Meteor Property Recovery Fund, NDFA Fixed Income Plan June 2008, and DRL Kickout Plan issue 1.

The Arc Fixed Income Plan 6 went live with Lehman as counterparty, having specified a 'major UK bank' in the brochure.