Now we must pay?

The letter summarised the legal position under European human rights law and the charges to be laid against the FCA for breaches of the sections under the relevant Act.

The letter details the loss of property rights, which is actionable for compensation against the otherwise ring-fenced and ‘immune’ status of the regulator in English law. All UK remedies have been exhausted. The investors’ application for compensation is being pursued under Article 1 of the human rights legislation through the European court.

Why are investors faced with pursuing a case that, if defended by the FCA or the government, will be at the expense of the UK taxpayer? This is clearly an example of “the unjustifiable being protected by the unacceptable”.

How did we reach the point at which it becomes necessary for investors to issue legal proceedings against a body established to protect the interests of investors? And this in order to protect those investors from the actions of the very body established to protect those same investors? The question itself is so convoluted as to be almost insane in its reach and meaning. Yet that is the position we have reached.

The FCA, and the FSA before it, has managed to hide its very long list of failure behind a cloak of immunity under UK law for too long. It was always apparent that at some point enough would become more than enough.

The EEA Life Settlements fund was launched in November 2005 to provide investors with an opportunity to invest in a fund non-correlated to the stocks and share market volatility.

The fund is invested in impaired life assurance policies taken out on the lives of US citizens who were seeking a means of realising some value, higher than a surrender value, earlier than the policy payment on the death of the life assured.

There was one risk that was not, indeed could not have been, recognised or researched by anyone

The fund offered investors an alternative investment where the risks involved with the investment were identified as preordained benefits without involving the risk of loss to an individual investor.

The scheme was established as an unregulated collective investment scheme and the promotion of the fund was in effect confined to investors who were either sufficiently sophisticated to understand the nature of the risks or were considered to be high net-worth investors by reference to the FCA definition contained within the relevant rules and regulations covering such schemes.

At its height the fund invested over US$1bn on behalf of clients that included wealthy individuals, institutional investors, discretionary fund managers, and pension fund managers, all of whom carried out serious due diligence into the risks attached to the fund.

One can argue late into the night over the suitability of the investment for some clients. However, there was one risk that was not, indeed could not have been, recognised or researched by anyone – the impact of an unguarded and irresponsible public statement by the financial regulator.

On 28 November 2011 Margaret Cole, then a director of the FSA issued a statement intended to accompany the launch of the mandatory guidance consultation into its proposed regulation of unregulated schemes, including the EEA Life Settlement Fund.

Let us be clear here, the FSA had raised some concerns over the potential problems that existed for clients that were not suitable investors for life settlement funds. However, the FSA had appeared not to have conducted any form of due diligence into the different funds on offer.

Instead, Ms Cole announced, ahead of the ‘consultation’, that the FSA would be banning life settlement funds, describing them as “toxic”, “Ponzi” schemes and used other pejorative terms such as “death bonds” in reference to the underlying investment assets.

On 29 November, 29 investors spooked by Ms Cole’s statement, started the process to sell their investments.

Following an emergency meeting of the EEA board on 30 November, the directors declared that the fund did not have sufficient liquidity to meet the volume of immediate requests to sell assets for cash without damaging the interests of the remaining investors, and that dealing in the fund was suspended until further notice.

The timing of these events is no coincidence. It is an extraordinarily clear example of QED in charting the short-term consequences of the actions of an individual in a particular situation. This sort of consequential loss was repeated in more heavily publicised circumstances when the FCA told the world that: “it was going to investigate the closed books of life assurance companies”. That triggered the mass sell-off of shares in life assurance companies in March 2014.

The case can be stated as a simple formula for disaster: FCA issues statement; statement causes investors to panic; panic causes fund to close, all within the space of two days – shades of the Northern Rock Building Society debacle several years earlier – with no public or legal accountability.

Since then, of course, we have seen in print how many people criticised the role of the regulator in this sequence of events. However, the financial regulator has simply repeatedly played their “get out of jail free” card and ignored any call for accountability.

How did we arrive at a point where this sort of behaviour and causal effect can be deemed acceptable in any way? Can we really let the ‘guardians’ carry on doing what they want to the detriment of those they purport to guard?

Terence O’Halloran is a financial analyst and author of Hindsight – the Foresight Saga