Investors that purchased Merchant Capital structured products are to be hit with a wave of fees that could be “significantly more than double” what they were previously paying, following the now defunct provider’s parent company falling into administration.
Earlier this month FTAdviser revealed that Merchant Capital’s former custodian, Reyker Securities, could be set to levy new charges against the plans following the firm’s collapse, as terms and conditions imposed when it took on the book of business allow it to apply fees to cover any additional expenses incurred.
Costs for structured products are typically bundled into the initial purchase price. After Reyker took over the book Merchant had committed to continue paying fees on behalf of investors, but a winding up order was issued after it failed to pay fees owed to its former custodian.
The book taken on from Merchant also includes plans issued by other defunct providers Keydata and Arc.
Reyker confirmed at a press briefing on Friday (26 April) that it will be charging investors, with Adrian Barnwell, Reyker’s head of risk management and strategy, stating that the company is “bending over backwards” to help consumers as investors will not have to write a cheque and charges will be taken out at the end of a product’s maturity.
Reyker said that the minimum fee for a “typical” investments will be £75 per plan. On top of this investors will pay £115 per annum if their product is a capital accumulation plan and £195 per annum if it is a monthly income plan.
Reyker said that it intends to cap costs for investors, although this not guaranteed. Those in the capital plan may pay a maximum of £500 and those in the income plans may pay a maximum of £600.
Several structured products experts told FTAdviser that effectively investors who paid upfront fees will end up paying for the plan management services twice.
Ian Lowes, managing director of Lowes Financial Management, said: “These investors came to be under the custodianship of Reyker following the collapse of yet another firm, Pritchard Securities, when the investors were left with no real option but to sign up to Reyker’s terms and collectively pay them somewhere in the region of £250,000 in administration fees.
“Merchant were then liable to Reyker for ongoing administration and custody fees over a period of six years. I understand these fees were to be no more than £170,000 a year, decreasing each year.
“Following the collapse of Merchant, Reyker are now seeking to charge clients what seems to be significantly more than double what they were originally going to receive from Merchant; as much as £600 per investment.
“This cannot be permitted. If nothing else, it is surely not treating customers fairly.”
Mr Lowes added: “Each client already paid all reasonable fees up front and so the Financial Services Compensation Scheme must surely meet any further costs given that these have ultimately arisen because of the failure of at least two, and in some cases, three UK financial services firms.”
Chris Taylor, founder and managing director of the Investment Bridge told FTAdviser: “The levels of the fees that Reyker are stating they will impose does seem cause for concern. The average investment may be quite low, including many investors who will have simply made a standard ISA subscription.
“So fixed costs of £500-600 are high and, interestingly, are surely in excess of any level of fees that any third party provider would negotiate with Reyker today, under normal circumstances, for such services.”
Graham Devile, managing director of Meteor Asset Management, told FTAdviser: “We feel that the proposed charges seem on the high side and are currently exploring if we are able to offer advisers and their clients a cheaper alternative.”
Mr Barnwell said: “We are applying charges and they will be taking effect in three months time so giving consumers three months notice that charges will apply.
“We’ve been discussing this with the regulator for some while. In practice we needed to see what’s happening with Merchant and its parent so we will be levying charges only when plans come to an end.
“Obviously if we were dealing with a promoter we would expect to be paid monthly but from a consumer perspective charging tens of thousands of consumers every month isn’t a practical proposition.
“We are well financed so we can afford to lend them the money until then. Some of these plans will last for five or six years so this is a fairly long-term project that we are dealing with here.
“Most investors will have costs below and usually significantly below this intended plan maximum. Long-term investors with large investments should not have more than £500/£600 deducted per plan.”
