Fos decision on Harlequin must be tip of iceberg

It is little wonder that Sipp complaints regarding esoteric investments, such as Harlequin, are beginning to filter through to the Fos’s online decision database, as earlier this year Fos statistics revealed Sipp complaints to the ombudsman had risen by 49 per cent in the 12 months to 31 March, compared to the previous year.

At the end of March, there were 1,039 Sipp complaints, with almost three quarters of the complaints stemming from advice to invest life savings into unregulated and unsuitable investments. The Fos upheld 63 per cent of complaints.

Now they are starting to filter through on the ombudsman’s database.

The first published decision regards a couple, only known as Mr and Mrs A, who complained that Harris Knights and Co Limited gave them unsuitable advice to switch their existing pensions to a Sipp in order to buy property in St Lucia. The Harlequin resort in St Lucia is called Blu. It also has a resort in St Vincent and the Grenadines.

According to the ombudsman, the couple were introduced to the Harlequin property development by a regulated adviser who was also an agent for Harlequin property.

The adviser introduced Mr and Mrs A to Harris Knights to find a suitable Sipp. The decision said Harris Knights indicated they were only advising on the Sipp and they would “not ordinarily recommend” the Harlequin investment.

However, ombudsman Roy Milne upheld the complaint, stating that while Harris Knights said it was only advising on the Sipp, he was not satisfied that it could give suitable advice without considering the investment objectives and Mr and Mrs A’s circumstances.

Harris Knights disagreed with this, stating that the couple had previously bought a Harlequin property, which was not disclosed to them and, if it was, its decision to give advice “would have been entirely different”.

The ombudsman found that while Harris Knights’ suitability letter emphasised “the substantial increase in risk between the Harlequin investment and Mr and Mrs A’s existing pension provisions”, Harris Knights were under a duty “to give suitable advice”.

The ombudsman wrote: “It is difficult to see how a recommendation to start the Sipp can be suitably made without considering the proposed investment itself.”

In April, Harlequin announced the first completion and transfer of title had taken place for an overseas property in its flagship resort, Buccament Bay, claiming this was “a clear indication” it can fulfill its obligations to investors.

While the ombudsman emphasised that the “current correspondence” from Harlequin is “fairly positive in tone, the investment cannot be currently redeemed”.

As it cannot be redeemed, the ombudsman has ordered Harris Knights to take ownership of the Harlequin investment and compensate the couple in full.

It appears the ombudsman came to that conclusion as it is difficult to determine the losses in this asset due to its fluctuating value and therefore there would be difficulty in calculating the appropriate level of compensation.

Last year, The Lifetime Sipp Company said in a letter to clients seen by FTAdviser, that until the Harlequin investments are realised or a professional valuation is available, the value of their Harlequin property investment will be shown in future valuations as £1.

FTAdviser previously revealed that Harlequin had paid financial advisers a commission rate of up to 9 per cent of the sale price of a property.

In June 2013, a Harlequin spokesperson said that unit prices for Harlequin investments started at £50,000, meaning the 9 per cent rate would equate to commission of up to £4,500 once Harlequin has received the client’s 30 per cent deposit and signed contracts, which generally should be received within 45 days.

The recruitment document also stated that the most “significant opportunity” is through Sipp route and this forms “a major part of our business”.

In April, FTAdviser reported that advice to transfer assets into esoteric investments wrapped within Sipps is to come under a greater level of scrutiny after the regulator issued an alert signalling a tough tone.

The watchdog said in general its supervisory work found “very poor standards of advice” and that it expected further referrals to its enforcement division.

The FCA said it was not looking to ban non-mainstream Sipp recommendations for retail investors in the way it has for unregulated collective investment schemes, stating they “have a right to have an authorised firm to act in their best interests”.

It has toughened its stance, however, as “the serious and ongoing failings found at firms have placed a substantial number of customers’ retirement savings at risk”.

A spokesperson for Fos says: “The majority of Sipp complaints received last year were about advice to invest in products, such as overseas property.”

Martin Tilley, director of technical services at Dentons Pensions, adds: “I think there will be more [complaints] before it gets better. And this may well be used as a precedent where the asset is difficult to value.”