Around 6,000 people lost their life savings when Lehman Brothers collapsed - despite being told repeatedly that their investment was "100% capital secure". Finally, the FSA is fighting back...
There was welcome news this week for investors who saw their savings disappear when American investment bank Lehman Brothers collapsed in September. All told, some 6,000 savers lost on average £32,000 each when supposedly safe low-risk 'structured investment products' turned out to be backed by the bank -- even though, as we revealed last month, sales and marketing literature made no mention of this.
In a joint announcement with the Financial Ombudsman Service, the Financial Services Authority (FSA) said that it would review the sale and marketing of these products under its 'wider implications' process -- a move that could see the firms in question fined and instructed to compensate those who lost out.
Power to the people
The announcement follows a request made to the FSA by the chairman of the House of Commons Treasury Committee, John McFall. Like lovemoney.com, MPs from all parties have been calling for such an investigation as the full extent of the scandal emerged: many of the people affected by it are pensioners, who wanted a safe haven for their money in retirement. One investor is over 90 years old.
Better still, the involvement of the FSA in what had been previously been an Financial Ombudsman-only investigation could see savers who haven't so far complained to the Financial Ombudsman receive compensation, if it turns out that the FSA agrees that the information given to savers was flawed or misleading.
And certainly, there's plenty of evidence that not only did some of the sales literature in question underplay the risks involved, it also promised investors the 'protection' of the Financial Services Compensation Scheme -- protection that in fact didn't apply, due Lehman's non-membership of the scheme. If that's not mis-selling, I don't know what is.
Observers expect the FSA to focus particularly heavily on the repeated use of phrases such as "guaranteed", "100% capital secure", and "your initial capital investment will be returned to you in full" -- phrases, of course, that in the event proved to be completely and utterly one hundred percent wide of the mark.
Also coming under the microscope will be the suitability of the products for the savers in question, and whether their financial intermediaries adequately explained the risks. Many savers have turned out to be inexperienced investors who had no idea that their money was to be invested in a complex derivatives-based stock market fund.
Indeed, one of the ironies of the scandal is that it's precisely because they were inexperienced that most of the savers involved turned to their financial advisors for advice -- advisors who promptly charged them commission on the flawed products that they sold them. One advisor, it turns out, earned £12,000 from selling £200,000 worth of structured products to a single individual.
It's not all good news
But while welcome, the announcement isn't without its drawbacks. Although the Financial Ombudsman's investigations into individual cases were never going to be especially quick, the involvement of the FSA will undoubtedly add a further element of delay. And while the FSA's investigation is ongoing, the cases of all those currently being looked at by the Financial Ombudsman have been suspended.
While the FSA isn't making any predictions as to how long its investigations will take, savers will be hoping that it moves more speedily than the Office of Fair Trading's High Court 'test case' in respect to bank charges, for example, which saw almost a million people have their claims for bank charges frozen in July 2007.
Equally, another role model to be avoided is the long-running Equitable Life saga, which rumbles on almost a decade after the firm closed to new business. Just last week, the Parliamentary Ombudsman, Ann Abraham, raised the stakes by formally criticising the government for its response to her report requiring it to compensate Equitable savers who lost out due to maladministration.
Meanwhile, most savers in Icelandic banks Kaupthing Edge and Icesave were reunited with their savings in a matter of weeks. As it undertakes its investigative work, that's the role model I hope the FSA will keep in mind.
Finally, if you've been affected by the Lehmans crisis, don't forget you can join the SPIRIT action group (which stands for Structured Products Investors Recovery & Information Team), set up by a victim of the scandal, Peter Howard. To join, email spiritedawaybylehmans@hotmail.com
Here's hoping justice is done!
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