Ian Coley from Medical Investment & Advisory Services LLP, is an angry man. The FCA has played a pivotal role, he says, in destroying an asset class and – seemingly purposefully – causing financial distress to thousands of clients .
Part One – the simplicity of QED in this Case
I make no apology for coining a phrase that mimics the classic philosophical version (“Who will guard the guards themselves?”).
The EEA Life Settlements fund was launched in November 2005 to provide investors an opportunity to invest in a fund, which invested in impaired life assurance policies taken out on the lives of US citizens who were seeking a means of realising the life assurance value earlier than the policy would normally allow. The fund offered investors an alternative investment not correlated to other assets classes such as stocks and shares, bonds, property or cash. The risks involved with the investment were identified as befits any investment 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 banned except 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 definition contained within the relevant rules and regulations covering such schemes.
Last week, the Action Group for Life Settlement Fund Investors issuedits letter to the FCA, setting out the case against the then FSA.
In essence, the letter summarises the legal position under European Human Rights Law and the charges to be laid against the FSA for breaches of the relevant sections of the relevant Act.
In essence, the loss of property rights is actionable for compensation against the otherwise ring fenced and ‘immune’ status of the regulator in English law. The investor’s application for compensation is being pursued under Article 1 of the Human Rights legislation and the European court.
But, how does it come to this? Why are investors faced with pursuing a case that, if opposed by the FSA or HM Government, will be at the expense of the UK taxpayer? To borrow another plagiarised literary reference, this is 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 in order to protect themselves from the actions of the very body established to protect them?
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 FSA has managed to hide its very long list of failures behind a cloak of immunity under UK Law for too long, and it was always apparent that at some point enough would become more than enough.
Much has been made, not least by the FSA, of the actions of advisers in promoting the funds and certainly it would be disingenuous to suggest that some advisers did not promote the fund to inappropriate investors, but the fact remains that the investment was entirely appropriate for the majority of the scheme investors.
At its height the fund invested over $ 1 billion on behalf of clients, including wealthy individuals, institutional investors, discretionary fund managers, 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.
On November 28th 2011, Margaret Cole, then a director of the FSA, issued a statement intended to accompany the launch of the guidance consultation into its proposed regulation of unregulated schemes including life settlement funds.
Let us be clear here, the FSA had raised some concerns over the potential problems that existed for clients who were not suitable investors for life settlement funds, however, the FSA had not conducted any sort of due diligence into the different funds on offer. Instead, Margaret Cole issued one of the most seriously damaging and ill thought through statements imaginable when she announced ahead of the consultation that the EEA would be banning life settlement funds and describing them as “toxic”, “Ponzi” schemes and used other pejorative terms such as death bonds in reference to the underlying investment assets.
On November 29th, investors spooked by the Cole statement started the process to sell their investments.
Following an emergency meeting of the EEA board on 30th 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 less damaging in the short-term but more heavily publicised circumstances when the FSA told the World that it was going to investigate the closed books of life assurance companies triggering the mass sell-off of shares in life assurance companies in March 2014.
The case effectively becomes almost as short as a simple mathematical formula:
- Cole issues statement
- Statement causes investors to panic
- Panic causes fund to close
- All within the space of two days.
Since then, of course, we have seen many people criticise the role of the FSA in this sequence of events, but the FSA has simply repeatedly played the “Get out of Jail Free” card and ignored any call for accountability.
So, I repeat my initial question.
- How on Earth 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?
- Surely, the time for reckoning is here now.
Part Two of Ian’s blog will appear next week. Do write to us at email@example.com with your own views on this or any other matter.