The news that more than 1,000 people are participating in a class action against Friends Provident International and Utmost International is a matter of great interest to those in the UK determined to see off the threat of financial scams, especially scams involving pension money.
We have known for some time that offshore life bonds are being used by certain advisers to extract substantial commissions from client investments. This is the first part of the problem and is structural. The payment of commissions sometimes well in excess of 10% of the amount invested can never be justified by an adviser and would not be countenanced by the FCA. The Isle of Man has created a loophole for bad practice.
The second issue, one that is closely aligned with the first, is the practice of rewarding some advisers by those investing the money (rather than running the bond). Here the commissions can be even higher, especially when the intention is to run the investment to zero via a scam. That regulated investment bonds offer such opportunities has long been known about and that it continues to happen is a second indictment against the Isle of Man regulators.
The court case is at an early stage and has apparently concentrated so far on “caveat emptor”, the duty of consumers to look after themselves. This is not the consumer duty we recognise on the mainland of the UK. Here . the regulatory view is that financial services are complicated and that it is the duty of advisers and product providers to offer information needed to make good decisions. It is not the business of consumers to do due diligence on investments which are presented by advisers as suitable, that is the duty of the adviser. If there is no adviser, there is still a duty on providers not to offer investments which are inherently risky without fully explaining the risks.
There are too many examples where both advisers and providers have colluded to the mutual advantage of both, not to take a class action of so many investors against these two life companies very seriously indeed.
If you are not fully aware of how consumers get ripped off , watch this shocking video
For so long as Crown Dependencies and aligned jurisdictions continue to operate under a seeming corresponding approval from the FCA, the more the Consumer Duty is brought into disrepute in the UK.
The use of what appear to be cloned versions of UK life companies such as Clerical Medical, Utmost (the new name for Equitable Life), Friends Provident, Skandia and Old Mutual simply extends this sense of legitimacy for practices which are at best “sharp”.
How does the financial loss compare with the LDI issue?
The answer is that both can be devastating. However as in all scams the individual is left with a feeling of guilt from a feeling of person responsibility.
In the case of LDI the responsibility is shifted to the Trustees and their advisors (also in my view The Pensions Regulator) in encouraging schemes to switch their investments to those with negative real returns. Also the bulk of the losses were and are being borne by the scheme sponsor in deficit contributions that should not have been required. Also the individual pensioner has lost potential pension prospects (a loss of expectation which he or she may not have recognised) rather than an absolute financial loss. So in spite the vastly increased number of members and pensioners affected, the loss feels remote and hypothetic to the individual even though the effect may not any less. For example do the Debenham’s employees who lost their jobs blame it on the £350M reported deficit that has proved to be entirely illusory.