RegulationApr 19 2012

Scotland-based broker default to add £10m to FSCS redress

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ByDonia O’Loughlin

The Financial Services Compensation Scheme has confirmed to FTAdviser that Scottish broker firm Direct Sharedeal was declared in default on 29 March.

Regulatory Legal, acting for 84 investors in Direct Sharedeal, warned this could add a “significant further redress” to the 2012/2013 FSCS financial year, estimating it to be in the region of £10m.

In February 2010, the Financial Services Authority fined Glaswegian firm Direct Sharedeal £101,500 after an appointed representative firm used misleading sales pitches when recommending contract for difference products.

CFDs are derivative products that are designed to allow investors to bet on price movements, by providing a return based on the difference between the opening and closing price are a given security or market. If the underlying asset decline in value, investors can lose money.

The products are typically leveraged, meaning that gains - and losses - can be large.

First Colonial Investments, an appointed representative of Direct Sharedeal, was judged by the regulator to have failed to set out inherent risks of buying penny shares. The FSA said in its final notice that Direct Sharedeal should have ensured the company was providing accurate and sufficient advice on penny sharedealing.

Gareth Fatchett, director of Regulatory Legal, told FTAdviser: “The Direct Sharedeal Ltd firm had already been sanctioned by the FSA prior to it crashing into administration.

“Our clients brought significant multi-million pound claims to Direct Sharedeal Ltd in relation to the management of the accounts.

“The FSCS will very shortly have to declare whether the claims are eligible for redress. We believe they are as the management of our clients accounts was in our opinion way below accepted standards.”

A spokesperson for the FSCS said: “FSCS is aware of the situation with Direct Sharedeal Ltd. We are working with the administrators to get the information we need to handle potential claims. To date there have been over 400 claims received.”

At the end of 2011, Regulatory Legal said that the FSCS must compensate investors that lost money after the collapse of Direct Sharedeal, claiming that a “civil liability” still exists in relation to the business.

Mr Fatchett claimed that a liability should exist as Direct Sharedeal went bust earlier this year, indicating that it had “lost control” of its business. He added that any firm that is betting on market movements is effectively gambling with “high stakes”.

At the time he said: “Under the Financial Services and Markets Act 2000 rules, Direct Sharedeal were responsible for ensuring clients were suitably informed of the risks and pitfalls of trading in highly leveraged instruments.”