The Financial Conduct Authority has told two advisers banned and fined for inappropriate advice in relation to self-invested pension transfers involving esoteric assets including Harlequin Property, to hand close to £500,000 in penalties to the industry compensation scheme.
In two final notices, published today (17 April), Andrew Rees and Timothy Hughes, partners at now defunct 1 Stop Financial Services, were banned by the FCA, but were told fines totalling £490,100 had been waived.
Instead the two men have agreed to pay the full amount of the penalties to the Financial Service Compensation Scheme, which the FCA said is likely to be hit with a barrage of claims in relation to the transfers.
Mr Rees and Mr Hughes had advised customers to switch their pension savings into self-invested personal pensions and through these invest in unregulated and often high-risk products, “regardless of whether those products were suitable for the customers”.
Between October 2010 and November 2012, Mr Rees and Mr Hughes’ firm advised nearly 2,000 customers on switching their existing pensions, valued at in excess of £112m, into Sipps.
The final notices say that 49 per cent of those customers were invested in overseas property developments operated by Harlequin Property, meaning £56m was invested in the firm’s overseas development.
FTAdviser previously revealed that property group Harlequin, who is subject to a Serious Fraud Office investigation, paid agents commission of up to 9 per cent of the sale price of a property.
Harlequin Property entered administration last year amid a range of claims and legal disputes, after the FCA issued an alert to advisers that had directed large sums of money via Sipps into the firm’s overseas hotels and resorts.
Clients of Mr Rees and Mr Hughes were also advised to invest in diamonds, the regulator said.
Mr Rees was fined £215,000, reduced from £307,173 due to an early-settlement discount of 30 per cent being applied. Under the same terms Mr Hughes was fined £275,100, down from an initial £393,079.
The unusual decision to pay fines to the FSCS comes after changes in 2012 that now require all penalties paid to the FCA, net of enforcement costs, to go into Treasury coffers. Much of the money is used to fund charities supporting war veterans.
The FSCS itself has trumpeted recent initiatives to boost recoveries and reduce costs to the industry, which it says helped it to reduce the expected levy for 2014/2015 from a forecast £313m to £285m.
In contrast, the levy on investment advisers was increased by £7m to £112m after a £30m interim levy was postponed in March.
An FSCS newsletter, published yesterday (16 April), revealed the compensation scheme has set aside £7.2m to take on advisers in court over Keydata recommendations to build on the £44m in recoveries in relation to the products next year.
Today’s final notices reveal the FCA found that the banned adviser duo did not take reasonable steps to ensure the underlying investments were suitable and they did not establish customers’ investment objectives or their attitude to risk.
The FCA also found that the partners failed adequately to disclose a conflict of interest, as they were directors and shareholders of EGI, a firm that referred almost a quarter of 1 Stop’s Sipp customers during the relevant period.
For these referrals, EGI was paid a fee, meaning that Mr Rees and Mr Hughes were benefitting from both the fees paid by customers for the advice given by 1 Stop and also from the commission received by EGI.
Mr Rees and Mr Hughes, whose firm was located in Pembrokeshire, will be writing to all customers who are potentially affected to inform them of the outcome of the FCA’s investigation, and the FSCS’s ongoing work to establish whether redress may be due to some or all customers.
The final notice for Mr Hughes said: “The amount of any such liability is currently unknown but is being investigated by the FSCS.”
Tracey McDermott, FCA director of enforcement and financial crime at the FCA, said: “By enabling customers to invest in unregulated and often high risk products without assessing suitability, these men exposed customers to the risk of losing their hard earned pension funds.
“This was then compounded by the partners’ failure to ensure that their customers fully understood these risks”.
