A decade of structured product misery

1999

Eurolife (NVesta) issues 2,300 'capital secure' bonds to ISA savers, raising £14.8m. When the products are due to mature four years later, the money is gone.

March 2000

Precipice bond sales are in full swing. One example, the 'Canada Life High Income Bond 3' offers a headline rate of 10.5% gross per year over 3 years and full return of capital providing the final Nasdaq index value is no more than 20% down from its starting position, otherwise there will be a 3.33% loss of capital for every 1% fall in the index over 20%. This is just one of dozens of other plans with a sting in their tail. Three years later, investors in the Canada Life bond lose their entire investment thanks to the decline in Nasdaq after the technology bubble burst.

August 2003

Thousands of mainly elderly investors discover that complex bonds bought to boost their income are unravelling and that their adviser (RJ Temple) has gone out of business. RJ Temple traded as an independent financial adviser but had links with a company that designed the bonds. (Financial Products Development Associates, which worked for precipice bond providers such as Nvesta, GE, Liverpool Victoria and NDF, advising on the specification of their products and helping with marketing). RJ Temple also sold the bonds directly to clients through mailshots and was not required to provide personal advice to these customers on whether the products were too risky for them.

September 2003

Lloyds TSB fined £1.9m by the FSA for misselling structured products and is left with a bill of at least £98m to compensate customers. The fine relates to 22,500 policies of the Scottish Widows extra income and growth plan sold through Lloyds TSB branches between October 2000 and July 2001.

October 2003

Investors in the NDF Extra Income & Growth Plan 3 have lost 81% of their originally invested capital. The plan was linked to the Eurostoxx 50 index, but with punishing terms if the index fails to perform. Income of 10.25 per cent per annum has been paid during the term of the plan, making the overall loss about 50%.

December 2003

IFA Chase de Vere fined £165,000 by the FSA for a "misleading precipice and high income bond promotion".

May 2004

The Financial Ombudsman has received more than 6,000 complaints about structured products ("precipice bonds").

June 2004

The Financial Services Authority admits it may have encouraged precipice bond mis-selling by offering "implicit comfort" to vendors of the products that could see investors lose up to £5bn.

October 2004

Treasury select committee member Norman Lamb is to organise crisis meetings with regulators over the lack of help for most precipice bond victims.

December 2004

David Aaron Partnership, one of the UK's best-known independent financial advisers, has collapsed with mis-selling claims. The firm was swamped with compensation claims from hundreds of clients alleging they had been mis-sold structured products. David Aaron had sold 11,000 high-income bonds.

Bradford & Bingley fined £650,000 for the "widespread mis-selling" of risky high-income bonds and must pay £6m in compensation to 6,800 investors who lost out. The mis-selling occurred between January 2001 and December 2002.

January 2005

Eurolife capital secure bonds fail for 2,300 investors

July 2005

Keydata begins marketing structured products backed by Luxembourg firm SLS and secured on life insurance policies of senior US citizens.

November 2005

Lawyers Norton Rose tell Keydata’s directors its promotional literature for the Secure Income Bonds (SIB) fails to meet FSA requirements. KPMG informs the FSA its name is also being used by Keydata against activities it isn’t carrying out.

June 2006

US house prices peak and begin a steep decline. Lehman reports a 47% increase in second quarter earnings, though the firm’s share fell the most in almost four years amid concerns that the tumbling stock market will hurt the bank’s profit.

August 2006

IFAs that sold Eurolife secured bonds face a flood of complaints with Eurolife Assurance Group going into administration just 18 months after reaching a compromise deal with investors on capital secure bonds

December 2006

Moody's rating agency warns of a "rapid increase" in the potential for loss in Lehman Sub-Prime Mortgage Bonds citing high levels of late payments and foreclosures piling up early in the loans' lives. This follows earlier warnings from ratings agencies about sub-prime bonds.

March 2007

Lehman sees more subprime woes CNN

April 2007

Sesame IFA network is fined £330,000 by the Financial Services Authority (FSA) for incorrectly rejecting hundreds of complaints about structured products it had sold.

July 2007

Lehman denies rumours about its subprime exposure. In fact, Lehman has underwritten more mortgage-backed securities than any other firm, accumulating an $85-billion portfolio, or four times its shareholders' equity. HSBC warns of sub-prime losses and spooks the market. A string of mortgage lender failures follow. Panic sets in to the market. Four UK firms: NDFA, ARC, METEOR and DRL start marketing Lehman-backed structured products.

August 2007

Lehman sheds 1,200 jobs as it closes BNC Mortgages.

September 2007

Lehman announces the first quarterly loss in five years as a result of $700m loss from the credit crunch. The bank announces another 850 jobs would be cut in the latest round of restructuring of its residential-mortgage operations. There is a run on Nothermn Rock Bank, the first such UK bank run for 150 years.

November 2007

Sub-prime crisis continues. Who's next? Business Week

December 2007

Lehman says fourth-quarter net income fell 12% after it took a further $830m hit in fixed income business.

January 2008

Lehman announces it will stop wholesale mortgage lending in the US, and will cut 1,300 mortgage jobs. Gordon Brown issues communique highlighting transparency issues with structured products.

March 2008

Bear Stearns collapses after continuing to invest in housing loans, and is rescued by JP Morgan Chase. Lehman Brothers issues $4bn shares to quash concerns about its balance sheet. Lehman reports $489 profit for the first quarter, down 57% from the previous year. The US Securities and Exchange Commission and the Federal Reserve place full-time teams at Lehman to keep an eye on its financial condition.

S&P cuts Lehman credit ratng outlook to "negative", and Moody's cuts Lehman outlook from positive to stable. Lehman's shares plummet 20% that day.

April 2008

Ratings agency Fitch cut their medium-term outlook on Lehman's ratings to negative. Lehman bails out five of its short-term debt funds, taking $1.8bn of assets from the investment vehicles on to its books. The US bank also shuts its two UK sub-prime mortgage divisions.

May 2008

High-profile hedge fund manager David Einhorn criticises Lehman and chief financial officer Erin Callan, igniting fierce debate on Wall Street about the investment bank's health. Lehman cuts another 1,500 jobs.

June 2008

Standard & Poors lower their Lehman credit rating from A+ to A; Fitch cut their credit rating from AA- to A+ and keep their outlook at 'negative' ; 9 Moodys lower their Lehman outlook rating from stable to negative. Lehman CFO is named in law suit alleging that reporting of sub-prime exposures lost shareholders billions. He leaves the bank as does chief operation officer Joseph Gregory. Lehman announces plans to raise $6bn in new capital to shore up its balance sheet.

FSCS take Abbey National (Santander) and NDF to court to recover costs of compensating precipice bond mis-selling by IFAs in the early 2000's. Their case against NDF: "NDF was subject, as regards its promotion of the products, to the relevant rules made first under the Financial Services Act 1986 (the 1986 Act) and, in relation to promotion after 1 December 2001, by the FSA under FSMA. FSCS contends that the marketing material for the products failed to make clear the risks associated with them and that investors were induced to invest in the products in reliance on misleading statements and material omissions. Its case is that if the marketing material had, as it puts it, fairly disclosed the degree of risk in the products, the investors would not have invested in them. It claims that NDF was in breach of the applicable rules regulating the contents of marketing material and its claims against NDF are for breach of statutory duty (section 62 of the FSA 1986 and section 150 of FSMA), negligence and misrepresentation"

Most of the NDFA, ARC, METEOR and DRL plans are sold during second and third quarters of 2008

July 2008

Lehman chief executive Dick Fuld contemplates taking the bank private. Hometrak, the counterparty backing Keydata's Income Property Bonds, fails.

August 2008

Lehman's Dick Fuld enters into negotiations to sell nearly $30bn in commercial mortgage securities and other illiquid assets, and hires Lazard to advise.

September 2008

Jeremy Isaacs, chief operation officer of Lehman Brothers Europe, resigns. Andrew Morton, global head of fixed income, leaves the firm. Takeover talks with the Korea Development Bank stall.

• Sep 9: Talks with Korea Development Bank collapse.
• Sep 10: Lehman brings forward its Q3 results by one day, reporting a $3.9bn loss and unveiling plans to spin off up to $30bn (£17bn) of its property assets into a separate public company, sell 55% of its investment management arm Neuberger Berman and dispose of $4bn of UK property assets to BlackRock. The bank's share price sinks to a 52-week low at $6.93 before recovering to close at $7.25, giving it a market cap of $5bn.
• Sep 11: Lehman's share price plummets by 42%, closing at $3.03, after Moody's Investor Services says that it will cut the bank's credit rating unless the company arranged a "strategic transaction with a strong financial partner."
• Sep 13: The US Federal Reserve confirms officials are meeting with Wall Street chief executives and the Securities and Exchange Commission over how to resolve the Lehman crisis.
• Sep14: Talks with potential buyers Bank of America and Barclays collapse after the US Federal Reserve refuses to back certain Lehman liabilities.
• Sep 15: Lehman Brothers enters Chapter 11 protection, bringing down the curtain on its 158 year history.

PwC sends in a team of 80 at a cost of £4m / week to unravel the complex derivatives book saying this is more complex than Enron. Barclays buys Lehmans US arm, Nomura buys European and Middle East arms, but not the debts. FSA identifies 5,620 UK retail investors with £107 million invested in these products

October 2008

SLS, the counterparty backing certain Keydata structured products marketed in 2005, defaults with £103 million of investors’ money.

November 2008

OPAL, sister company to NDF and DRL, issues a press release urging advisers to target the over-50s market

May 2009

FOS suspends handling Lehman-related complaints whilst the FSA undertakes "wider implications" review of options for regulatory solution, due to report 10 August. HMRC determines that some Keydata bonds are not properly ISA-qualifying, and presents Keydata with a tax bill for £5m.

July 2009

Early Day Motion debate at Westminster Hall. Ed Vaizey MP (Wantage) (Con) presents the case for investors with Lehman-backed plans to be compensated by FSCS. Exchequer Secretary to the Treasury (Sarah McCarthy-Fry) responds that there was no direct relationship between Lehman Brothers and individual consumers, therefore no FSCS unless civil liability can be proven against the firms that sold the products. BBC's Working Lunch reports that one major UK bank (acting as IFA) is refunding some of its customers. Keydata Investment Services is taken into administration.

August 2009

FSA issues holding statement on its Lehman "wider implications" review. It needs more time

September 2009

First anniversary of Lehman collapse. Investors protest at FSA's London office and meet with Dan Waters who announces "no rescue scheme for investors". FSA undertakes an audit of several IFAs including RSM Tenon. Both Gordon Brown and Peter Mandelson assert at the Labour Party conference that thanks to the actions of this UK Government, not one British saver has lost a single penny during the financial crisis

October 2009

FSA announces the findings of the Lehman "wider implications" review, including significant levels of unsuitable advice within nine of the 11 firms sampled, and that action will be taken against three IFA firms. Following the FSA's review, NDFA and DRL assess their position against future liabilities and are taken into administration. ARC follows two weeks later. The announcement spooks many IFAs who then blame the product providers and the FSA

November 2009

Cases against the failed Lehman product providers start being transferred from FOS to FSCS.

December 2009

FSCS announces that it is only accepting compensation claims for those Lehman plans where the promised returns were not linked to stock-market performance (so called 'capital secure' plans).

January 2010

FSA director of conduct risk Dan Waters warns that there remains a "significant risk of profound mismatches" between retail structured products and the needs of consumers who invest in them. Lifemark, the counterparty backing many Keydata plans, gets into cashflow difficulties. No further income can be paid.

February 2010

FSCS announces in its annual plan that it is setting aside £20m to cover 1750 Lehman claims, and that they are reviewing other potential types of claim and loss, so the total cost of structured products claims remains uncertain. The financial services industry reacts to the overall level of funding demanded by the FSCS (£90m) in the annual plan. FSA announces the first of its enforcement actions against IFA's. A £700,000 fine for RSM Tenon for giving unsuitable advice and for having poor controls over structured product sales and pension switches.

March 2010

FSCS announces that it is continuing to assess the position of the (estimated 3000) people with 'capital at risk' Lehman-backed products.

April 2010

FSCS faces a funding revolt by the finance industry. FSCS must fund Lehman compensation through a levy on financial intermediaries. IFAs are furious that they are included in this. 80% of IFAs say they would support legal action against FSCS. David Cameron's office: "This is exactly the sort of issue that we want to tackle by overhauling the existing consumer protection framework and creating a single new Consumer Protection Agency (CPA), which will take responsibilities to protect the consumer that are currently and confusingly divided between the Financial Services Authority (FSA) and Office of Fair Trading (OFT), and place them in a single powerful body able to stand up for consumers and ensure they are treated fairly".

May 2010

Ding dong! Gordon Brown's government has gone! The government that created the FSA (which regulated NDFA, DRL, ARC, Meteor and Lehmans in the UK). The government that lied to us after the event "as a result of this government's action, not one British saver has lost a single penny" . FOS has upheld a number of Lehman mis-selling claims against IFAs. FSCS is still in discussion with its lawyers concerning capital at risk Lehman-backed savings plans. IFAs are getting cold feet over their threat to boycott the FSCS levy, and the first IFA is struck-off by FSA for failure to pay.

June 2010

The newly formed coalition government announces that it will abolish the FSA in its current form and create a new consumer compensation body. Changes are unlikely to take effect until 2012. MP Dan Rogerson tables a Westminster Early Day Motion (EDM) calling for all victims of Lehman mis-selling to be compensated by FSCS. Which? magazine ranks structured products amongst the top ten 'useless' financial products and causes a storm amongst the industry. Several newspapers report that the Lehman administrators will offer to make earlier than expected cash payments to creditors in exchange for reduced claims.

July 2010

Lehman mis-selling victims re-approach their MPs. Some MPs thought the Lehman problem had been resolved already. Dan Rogerson MP meets with Mark Neale (FSCS CEO) to present the case for compensation. A number of other MPs contact the FSCS directly, some write to the Treasury, and at least one very influential MP has raises the issue with George Osborne the Chancellor. According to FSCS annual report: 1,288 (Lehman) claims were received by FSCS; 999 were completed; 99% of claims resulted in an offer of compensation; the average payment was £15,841. There is no reference to the 3000+ other NDFA, ARC and DRL investors with Lehman-backed products who are still waiting for FSCS to invite them to submit their claims. Natalie Ceeney (the Chief Financial Ombudsman) announces it will be several months before ombudsmen are available to deal with Lehman cases.

August 2010

FSCS announces that they hope to confirm their position on uncompensated Lehman plans (from NDFA, DRL and ARC) by September. It has taken almost a year to consider these plans.

September 2010

FSA fines IFAs Thorntons Law £35,000, Michael Royden £10,500 and Robert Peter Yarr £28000 for their parts in marketing Lehman structured products. The FSCS announces it will not be inviting claims from those with 'capital at risk' Lehman structured products. .FT Advisor, Citywire, ifaonline, moneyfacts BBC Investors Chronicle Trustnet Fund Strategy.

October 2010

Investors seek clarity on the FSCS announcement, only to hear that the announcement did not amount to a policy decision and was not therefore challengeable. FSCS at first refuses to issue claims forms, but gradually softens its stance. FSCS: 'the reason why those capital at risk (SCARP) investors are not automatically going to receive compensation is because the title of the products should have alerted an investor to the fact that it was a risky product' FT Advisor

November 2010

Lehman 'capital at risk' plan holders start submitting FSCS claims. The FOS rules that a couple with the Meteor Asset Management Prima 7 plan were misled on the basis of incorrect counterparty ratings. An IFA in Suffolk stages a one-man protest against bank product claims. A Court rules that consumers with losses exceeding £100,000 cannot obtain the first £100,000 via the Financial Ombudsman Service and then sue for the balance in the courts.

December 2010

UBS is ordered to pay $2.2 million in the largest Lehman mis-selling settlement to date. FSCS agrees to recognise Lifemark losses after months of investor campaigning. Norwich &Peterborough Building Society comes under increasing pressure for their part in selling Keydata plans. FSCS prepares for the launch of their £4m consumer awareness campaign which has been fourteen months in the making. Lehman victims pursuing FOS claims against national IFA Clarkson Hill face a set back as that firm closes following a FSA investigation into other matters.

January 2011

FSCS runs a live 'web chat' in conjunction with The Guardian to answer questions on how the FSCS protects our money and how to make a claim. Nearly all questions raised by participants are about Lehman-backed structured products.

Ernst & Young come under the spotlight for their role as Lehman auditors. Overseas Lehman investors continued with compensation awards in the US and Israel. HMRC declares that some ISA compensation sums may be reinvested without losing the ISA allowance. FOS issues a consultation paper on plans for the coming year saying that they remain under intense workload and financial pressure, particularly because of PPI claim volumes. FSCS launched their awareness campaign. The campaign cost £4m and was created by media planning agency Mindshare, creative agency McCann Erickson Manchester and Aardman. FSA launches a consultation paper on the future of product regulation and higlights the mis-selling problems with structured products. Barclays are fined £7.7m and ordered to pay £60m in compensation to 12,000 investors (not Lehman products). Barclays announce that they will no-longer offer investment advice in Barclays branches.

FSCS announce a £326m levy on Intermediaries (including IFAs) and fund managers to (mainly) cover the cost of compensating Keydata victims. IFAs are outraged.

February 2011

A small number of Lehman capital at risk cases are submitted to FSCS, but the first ones back are all rejected.

FOS confirms its judgement that a couple were mis-sold their Meteor Prima 7 plan due to the plan using a counterparty with a lower credit rating than advertised. This seems to be a turning point for other plans that were also sold with the wrong credit ratings across various product providers. FSCS are budgeting for between 20 ("best case")and 1025 ("worst case") new structured product claims to be submitted in the FY year 2011/12. The second FSCS/Guardian web chat takes place but spokeswoman Suzette Browne declines to comment on Lehman cases. The financial authorities are positioning themselves for the new regulatory regime in 2012 to replace FSA. The proposed CPMA will no longer be badged as a consumer champion, despite pleas from consumer bodies. Mark Neale FSCS CEO welcomes the announcement that FSCS will report to two bodies.

The Lehman liquidation continues, with news from Germany that the liquidators had reached agreement to recover $6.6 billion for one of the Lehman subsidaries that was used for some of the Lehman structured products. DRL, for example, placed the non-ISA plans with either Lehman Brothers NV (Netherlands Antilles) or Lehman Brothers Bankhaus AG. The liquidators fail in their attempt to get $11bn from Barclays. Overseas Lehman news: US victims filing arbitration claims of US$4 million; in Hong Kong, a bank employee facing a 7 year jail-term for her part in selling Lehman-backed plans has been cleared by the court. About 43,000 savers in Hong Kong had invested an estimated $1.8 billion in thee products.

In the run up to the ISA season, the newspapers publish stories about structured products not being covered by FSCS. The structured product industry continues defending its territory.

March 2011

FSCS starts paying compensation on some Lehman capital at risk claims, including Arc Fixed Income Plan 6; NDFA Fixed Income Plan June 2008; and DRL Kick Out Performance Plan Issue 1. Others with the same plans have been denied compensation. Meteor refuses to pay the amount awarded on the Prima 7 mis-selling case, whilst considering further action. Lehman structured product victims in Singapore and Hong Kong are unhappy with the proposed local claims settlements. In HK, the government urges investors to accept what is on offer to 31,000 investors (up to 96%) by the banks. FSCS continues under political pressure due to the size of the IFA levy, the funding mechanism in general, and the £4m spend on its awareness campaign. FSCS also needs to renegotiate a £18.6bn loan taken from Gordon Brown's government on favourable terms, costing £344m/year. Debate continues across the finance industry about the merits and dangers of structured products. Santander admits they do not know whether their products are covered by FSCS, and FSA says it would be 'good practice' to include this aspect in product brochures.

April 2011

The 'FSCS U-Turn' on Lehman plans hits the headlines, raising concerns amongst IFAs that they will be hit with further levy. Most Lehman FOS cases are still waiting in the ombudsman's queue. Meteor's largest outsourcing client, Gilliat, announces their intention to end the relationship which has been in place for 18 months. The ongoing battle between the funds management industry (represented by IMA) and the structured product industry (represented by UKSPA) hits a crescendo, with the publication of further reports and the placing of news articles.

May 2011

Meteor applies for permission for a Judicial Review of the FOS ruling on the Prima 7 mis-selling case. More Lehman mis-selling victims submit their FSCS claims. Natalie Ceeney, Chief Ombudsman reports "pretty scary cases of high risk investments being sold to low-risk savers" in an interview on BBC. FOS has made no progress on cases from this group over the past three months, and the queue is reported to be getting longer. Overseas: New Zealand: Payout imminents for Lehman investors; Singapore: Lehman investors drop their law suit against RBS; USA: FINRA fines UBS Over Lehman-Issued 100% Principal-Protected Notes.

June 2011

Meteor withdraw their application for permission for a Judicial Review of the FOS Prima 7 ruling and settle privately with the investor concerned. BBC Panorama broadcasts a documentary about mis-advice from banks. The FSA and their overseas peers issued further warnings about structured products in the retail market, and the structured product industry continued to defend itself.

July 2011

More Lehman claims are settled by FSCS for certain capital at risk plans, but other claims continue to be rejected. FSCS apologises for a letter sent to a Lehman claimant that previous payments for NDF plans had been only on the basis of 'fraudulent misrepresentation'. FSCS publishes its 2010/11 annual review, with no mention of Lehman, NDF, DRL or ARC. FSCS admits that its £4m advertising campaign has been a failure. There are reports from the US of Lehman bonds being traded at between 21 and 35 cents in the dollar. US FINRA and SEC issuing new warnings to investors about structured products; concerns grow about the credit-worthiness of European banks; and the UK structured product industry challenging the fund management industry to a seven-year contest.

August 2011

Some difficult appeals cases are now being paid by FSCS for Lehman plans. The FSA sounds more warnings that it will get tough on 'misleading product marketing'. Legal & General structured products that were 20% backed by Lehman mature, at approx 20% less than they might otherwise have done. The industry hails this as a success, with one commentator saying that Capital Protected investors were promised nothing in the literature.

September 2011

Three years since the Lehman collapse, around one third of Lehman savers have so far got their money back. Administrators Grant Thorton have been granted a further year to run NDFA. Theresa May MP (Home Secretary) is in the online press challenging FSCS about NDFA compensation.

October 2011

According to IFA Online, NDFA had been advised by legal counsel that both types of Lehman plan were likely mis-sold (capital secure and capital at risk). Credit Suisse are fined £6m after £198m of structured product losses.

November 2011

Grant Thornton writes to NDFA and DRL plan holders re-affirming their view that both types of Lehman bond were mis-sold. FSA issues renewed warnings about the risk of structured products. BBC reports that the Financial Ombudsman does not have the power to enforce compensation awards. Freedom of Information Act is extended to include Financial Ombudsman Service. Coutts are fined £6.3m for mis-selling AIG bond. Bank of Ireland bond holders face 100% write-downs. S&P downgrades banks across Europe (LLoyds and RBS are now at lower credit rating than Lehman before the collapse). FSCS lawyer names 537 IFAs pursued for Keydata SLS being mis-selling claims.

December 2011

HSBC is fined £10.5m for mis-selling to the elderly. FSCS is ten years old and goes on another PR drive. FSCS Chairman David Hall is awarded CBE for services to the finance industry. BBC's Rip Off Britain programme features two Lehman case studies and challenges FSCS Chief Executive Mark Neale who warns that investors in structured products 'should be prepared for the worst than can happen'. He also states (incorrectly) that Lehman structured product investors were told about the deteriorating credit rating at the time of investing. In the meanwhile, more members of the Missold Investments action group receive FSCS cheques, and more receive rejection letters during the month.

January 2012

FSCS announces its new Chairman from April will be Lawrence Churchill. The Treasury Select Committee lambasts the FSA for failing to protect consumers from a series of 'spectacular regulatory failures'. They accuse the FSA of being dominated by a tick-box culture. Mixed news continues for Lehman mis-selling victims, as some claims for some plans are upheld on appeal, whilst other claims for similar plans are declined by FSCS. The FSCS acknowledges its difference in opinion with Grant Thornton about whether capital at risk Lehman plans were mis-sold, and says it stands by its view.