Allegations of fraud that a government minister confirmed yesterday (7 May) are being investigated by police in relation to the collapsed Connaught funds will not provide any defence in client compensation claims, a spate of early ombudsman decisions reveal.
During a Westminster Hall debate, the first to be held by the All-Party Parliamentary Group looking into the matter, economic secretary to the Treasury Andrea Leadsom revealed that the police are looking into allegations of misappropriation of funds.
Connaught income funds were suspended in early 2012, following a series of alerts and interventions from the regulator over the previous year related to its underlying lender, Tiuta. Investors are believed to have suffered losses of more than £100m.
The funds were structured as unregulated collective investment schemes, with investor funds handed to Tiuta which offered short-term and bridging loans secured against property at a target 75 per cent loan-to-value ratio.
The Financial Ombudsman Service online decisions database lists eight complaints against advisers over investor losses in the defunct vehicles published since the beginning of 2013, all of which found against the adviser.
Only cases where an original adjudicator decision has been challenged and referred for consideration by an ombudsman are listed.
In almost all of the decisions, the main reason for finding against the adviser was that the recommendation was inappropriate simply due to the fact that Ucis are not suitable for retail investors and should only be considered by investment professionals and experienced investors.
In June 2013 the Financial Conduct Authority confirmed formal rules banning advisers and distributors from recommending Ucis for non-sophisticated retail investors.
In four of the decisions, advisers defended the complaint by stating that the fund was subject to fraud.
One adviser firm offered as a defence against two decisions against it that losses made by Connaught were as a result of “fraud by parties involved in the management or operation of the fund”.
Ombudsman Lesley Stead said: “I have not seen substantive evidence to support such a suggestion. Although I note what has been said about matters being reported to the police that does not, of itself, mean that any finding of wrongdoing will result.”
The same adviser firm argued in a third decision against it that the fund “is subject to fraud and the allegations of fraud have been lodged with the City of London Police”. He also said the regulator is “aware of the fraud issues [but has] investigated”.
Ombudsman Roy Milne argued “the fact” it has been reported to the police “does not mean that any finding of wrongdoing will result”.
A different adviser in a fourth decision also argued that any loss his client had made was due to “mis-information by a regulated scheme operator or fraud by other parties that should have been uncovered by the operator much sooner”.
Ombudsman Doug Mansell said he had not seen any “substantive evidence” to support such a suggestion but he considers that the loss was caused by the “unsuitable advice to” to invest in the fund.
A Fos spokesperson told FTAdviser it only had a “handful” of complaints involving Connaught.
Ms Leadsom revealed during the debate in parliament that the Financial Conduct Authority was still investigating the case and was also investigating complaints over Capita Financial Managers, which was the authorised corporate director of the fund until 2009.
The minister emphasised that the FCA is also continuing to focus on the role of advisers and is recommending clients to complain to their intermediary in the first instance.
Yesterday’s debate also say questions raised over the confusing structure nature of regulation on unregulated investments.
Conservative backbencher Guy Opperman and chair of the parliamentary group Alun Cairns were said to have visited the Financial Conduct Authority and left perplexed over the regulatory process for Ucis, such as Connaught.
Mr Opperman said: “[We] visited the FCA to look at the issue in question and we were shown a flow chart which identified the selling process for this investment.
“The number of elements that were regulated and the number of elements that were not regulated would imply that there is a significant amount of confusion within how the regulatory process works in the UK at the moment.”
Ms Leadsom said that she too was struck by the confusing array of regulated and unregulated elements in cases of this nature and said this had resulted in the case of Connaught in a “disastrous scenario” where investors had lost “lot of money” and in some case their life savings.
