Central to the investors’ complaint is who is responsible for claims made in financial promotions.
The outcome could have widespread repercussions for where blame for investor losses falls.
The dispute concerns a failed investment of £7.5m made by 973 investors in secured private corporate debt, known as ‘mini-bonds’.
Mini-bonds - typically issued by small businesses to raise funds - have attracted retail investors in recent years with projections of high returns, as low yields dog traditional securities.
However, mini-bonds are unregulated, non-transferable and not covered by the Financial Services Compensation Scheme, making them considerably riskier than other assets.
The mini-bonds in question were issued by Secured Energy Bonds PLC.
When Secured Energy Bonds PLC (SEB) failed last year, investors largely lost all of their investments.
Three hundred and fifty investors have lodged complaints with the Financial Ombudsman Service, claiming a financial promotion issued by SEB in late 2013 offering the mini-bonds for sale did not comply with Financial Conduct Authority rules.
However both the FCA and the Fos are claiming the case is beyond their remits.
Investors are awaiting a landmark final decision from an ombudsman this month on whether the Financial Ombudsman Service can investigate their cases.
They are poised to launch a judicial review against Fos to seek a change to its decision should it not favour the investors.
The mini-bonds - which were sold on a non-advised basis - had a maturity of three years and a coupon rate of 6.5 per cent a year paid quarterly.
Lawyers for the group of 350 investors argue a disputed offer document investors would have relied on was “misleading, inconsistent and inaccurate”.
Despite these alleged flaws, the document was approved by Independent Portfolio Managers Limited (IPM), a firm authorised and regulated by the FCA.
It is against IPM that the group of investors have brought cases to the ombudsman.
They are also considering High Court action against IPM if the ombudsman refuses to look into their claims.
According to a document from the investors’ lawyers, seen by FTAdviser, IPM denies liability on the grounds investors were not its customers under the FCA’s Dispute Resolution rules.
IPM argued its client and customer was SEB.
In February 2016 the FCA warned investors off pursuing IPM, as well as stating that “issuing mini-bonds… is not an activity which requires authorisation”, meaning the regulator also has no power to investigate SEB.
In a note on its website, the FCA stated firms that approve financial promotions on behalf of unauthorised firms “must comply with our rules on financial promotions.
The financial promotion must be ‘fair, clear and not misleading’”.
But it added for ombudsman complaints against IPM, “investors should note that it is unlikely their complaint will succeed if it is based wholly on IPM’s role as approver of a financial promotion – the firm would need to have carried on another activity in addition to approving the financial promotion (for example, advising the investor, or arranging the transaction for them)”.
Waterside Legal, lawyers for the investors, dispute the FCA’s stance.
Initially, the ombudsman concluded that it did have jurisdiction to investigate the investors’ complaints.
But, as a result of a second adjudication in January 2016, Fos has changed its position - essentially, it now agrees with IPM's assessment of the relationship between the parties.
However the issue has been referred from an adjudicator to an ombudsman for a final decision on whether Fos will consider the investors’ complaints for compensation.
A spokesperson for the Financial Ombudsman Service said: “The question of whether we have the power to look at a case isn’t always straightforward.
“Like in any case we’ll issue an initial assessment and both parties are free to provide more information for us to consider. This may change our assessment about whether a case is one we can look at or not.
“If either party don’t agree with an adjudicator’s assessment the case can be reviewed afresh by one of our ombudsman who will make a decision about whether we can look into the complaint or not”.
IPM did not respond to repeated requests for comment.
laura.miller@ft.com
