If you haven’t heard about Harlequin Property, or think its one of those esoteric investments only rogues sold and nothing to do with you, it’s time to think again.
I’ve been banging the drum about Harlequin since January 2013, when I first revealed some self-invested personal pension providers had suspended dealings (too late), with what at that time was thought to be a £200m unregulated overseas property investment in trouble.
That estimate is now £400m, according to lawyers acting for investors. The compensation bill paid out by the Financial Services Compensation Scheme for bad advice is already at £100m; a cost met by adviser levy payers.
But the FSCS only pays out up to £50,000. Many investors put a lot more than that into the Harlequin scheme, which was supposed to build luxury villas in the Caribbean properties that never materialised, even before a recent warrant was issued for chairman David Ames’ arrest last month.
So far advisers have borne the brunt of the criticism for mis-selling Harlequin. But it looks like the spotlight will now fall on Sipp providers.
Lawyers acting for investors are likely to argue the 2013 guidance from the FCA to Sipp providers is sufficient to build the case that the standards for enhanced due diligence related to non-mainstream investments were not met in the case of Harlequin, and others.
This has the potential to send shockwaves through the sector.
On the horizon, people who lost more than the £50,000 they claimed from the FSCS over poor advice to invest in Harlequin are building up a secondary line of claims against their Sipp providers.
No less than five well-known names have significant exposure to Harlequin. Two, I’m told, do not have the requisite professional indemnity insurance to cover the likely claims.
People close to the matter are saying this could bust all of the exposed providers – causing a massive headache for any adviser with clients using those providers, whether in Harlequin or not, and £200m of claims to fall on the FSCS to be paid for the Sipp providers left standing.
This could be a serious hit, at a time when some Sipp providers are already struggling to get enough cash together to meet the incoming higher capital adequacy requirements in September, though the need for them to do that may be what saves them.
Alternatively, half a dozen Sipp providers could go to the wall – if Harlequin doesn’t tip them over, the successful pursuit of them for losses related to that investment could then spill over into other costly claims about other troubled investments.
We are looking at a Keydata-like scenario - a many headed hydra - unless investors are just told tough luck, which seems unlikely.
I believe the regulator thinks it has pushed the issue under the carpet by taking action against a few advisers like Tailormade, which sold Harlequin by the bucket load.
But with most Harlequin investments made between 2010 to 2012, questions will be asked why it allowed such lax regulation of Sipp providers and the investments they could hold after the devastating effects on financial services of Keydata and Arch Cru in 2009.
The answer, whatever it may be, may come too late for the Sipp providers, and the thousands of advisers’ clients who may get caught up in their mass closure.
laura.miller@ft.com
