Jersey Financial Services Commission Logo


Alternate Insurance Services Limited, full public statement - 4 January 2010

Public Statement -
Alternate Insurance Services Limited (in liquidation) (“Alternate”)
Financial Services (Jersey) Law 1998, as amended (the “Law”)
Investment Business Codes of Practice (the “Codes of Practice”)
Jersey Financial Services Commission (the “Commission”)

The Commission has issued this public statement in accordance with Articles 25(b), 25(c) and 25(d) of the Law.

1. Introduction

1.1 This public statement serves to highlight serious breaches of the Codes of Practice by Alternate, an entity formerly registered by      the Commission under the Law to provide investment advice. It also serves to highlight to the general public the dangers of      investing in high risk investment products without fully understanding the nature and terms of such products. The Commission has      also issued a brief summary of the key points from the Alternate case considered relevant to the investing public, which can be      viewed by clicking here.

1.2 The Commission has taken extensive regulatory action against Alternate, beginning in 2005 and focussed on the recklessness of      investment advice given by Alternate to a number of its clients. Following an investigation the Commission found that vulnerable      investors had been recklessly misled by financial advisors employed by Alternate, principally Mr Robert Le Fustec and
     Mr Douglas Clark. The investors, with little or no understanding of complex financial investments, were induced to take part in      investments which were wholly unsuitable for them and as a direct result they suffered serious losses and in some cases part or all      of their savings.

1.3 The Commission took the unprecedented step of petitioning the Royal Court of Jersey to require Alternate to pay back investors.      Such action is a route currently restricted to the most serious cases of reckless professional misconduct. On 16 February 2007,      the Royal Court awarded judgment in favour of the Commission in 27 out of 28 cases and directed payments to be made to the      investors, totalling almost £1.6 million, to restore them to their previous position. However, Alternate was unable to pay back any      investors and went into liquidation. The Commission revoked Alternate’s registration under the Law.

2. TEPs and TIPPs

2.1 This public statement concerns complex investments in second-hand with-profit endowment insurance policies, which are      commonly known as traded endowment policies or TEPs for short. TEPs (and TIPPs) have been summarised below. A comprehensive      explanation on these products is set out in the Alternate judgment, available here:

2.2 Traded Endowment Policies (“TEPs”)

2.2.1 If the original person insured under an endowment policy wishes to cease to maintain a policy by not continuing         to pay the premiums until the maturity date, the original person insured has two options: they can surrender the         policy to the insurance company and be paid the surrender value at the time of surrender, or they can sell the         policy on the TEP market at the then market value. Investors in the Alternate case were advised to buy a         portfolio of TEPs usually part funded from the investor’s own savings with the balance funded by a loan from a         bank or building society. The loan was usually secured in favour of the lender by the underlying TEPs and in some         cases also by existing TEPs or other investments already held by the investors. Such arrangements are called         traded endowment investment portfolio plans.

2.3 Traded Endowment Investment Portfolio Plans (“TIPPs”)

2.3.1 The basic aim of investing in TIPPs is a hope that the value of the TEPs to maturity exceeds the total amount of         the loan including interest plus the investor’s own capital stake. If the value of the TIPP exceeded the value of         the loan plus the “own capital stake” upon maturity then the investor would make a profit. If, on the other         hand, the real value of the total loan increased (e.g. through a substantial increase in interest rates) by more         than the value of the TEPs, then the investor would suffer a loss. Such a profit or loss could be substantial.
        TIPPs involve “gearing” i.e. an increase of investment risk by borrowing money in order to purchase the
        investment.The level of gearing depends on the ratio of money borrowed to the surrender value of the         underlying TEPs. In all of the 28 Alternate cases, the gearing was excessive having regard to the overall financial         position of the investors.

2.4 Almost all the investors in the Alternate case were financially unsophisticated investors with little or no understanding of TEPs
     and TIPPs. The Commission is of the view that highly geared investment products, such as the TIPPs at the centre of this case, are      suitable only for financially sophisticated investors who fully understand the concept of gearing and appreciate the risks involved.      Any investor, whether sophisticated or not, should endeavour to have a full understanding of the investment products into which      they invest.

3. Mr Douglas Clark and Mr Robert Le Fustec

3.1 Mr Clark and Mr Le Fustec, when promoting TIPPs as a form of investment to trusting and vulnerable investors, failed to appreciate      the risks associated with TIPPs and, in particular, they:

3.1.1 failed to take into account that the value of the underlying TEPs could fall as well as rise;

3.1.2 failed to take into account the high level of gearing which meant that, in many cases, there was a real risk that         the investors would be called on to contribute further assets to the lenders to maintain their TIPP investment;

3.1.3 failed to take into account that, given the limited resources of most of the investors with which to meet any         such call, this represented a serious risk to the safety of their TIPP investment;

3.1.4 failed to take into account that, due to the costs, including interest charges associated with the loans used to         buy most or all of the TIPPs, it was necessary for the underlying TEPs to produce significantly high returns if the         investors were to avoid suffering losses;

3.1.5 failed to take into account the concentration of a substantial part (almost all in some cases) of the investors’         wealth into one product which itself was highly geared;

3.1.6 failed to take into account the potential difficulties in unravelling the TIPPs at an early stage without incurring
        a loss;

3.1.7 failed to fully establish the client’s financial circumstances;

3.1.8 failed to consider numerous other products or investments that may have been suitable for the clients;

3.1.9 totally ignored the clients stated attitude to risk;

3.1.10 at all times stressed the positive points of the TIPP scheme without due regard to the far more important high          risk factors;

3.1.11 led clients to believe that they would carry out reviews of the plans, when in fact this was left to the
         lenders; and

3.1.12 provided letters to clients setting out why the investments were suitable for them, wherein Mr Le Fustec and          Mr Clark provided misleading information and, in particular, failed to emphasize the high risk attached to          investing in TIPPs.

3.2 Alternate, through Mr Clark and Mr Le Fustec, breached various sections of the Codes of Practice and the Law. The Commission      considered that the serious breaches by Alternate amounted to, inter alia, breaches of principle 1 (failing to conduct business      with integrity), principle 2 (failing to have the highest regard for the interest of clients) and principle 4.2 (failing to communicate      information to clients in a way that is adequate, fair and not misleading) of the Codes of Practice in effect at the time.

3.3 Both Mr Le Fustec and Mr Clark have provided the Court with a written undertaking, on which the Commission relies, that they      will not seek to act as a principal person in relation to any person or persons carrying on financial service business1 in Jersey and      they will not seek to act in any capacity that involves the giving of investment advice. The Commission will monitor this carefully to      ensure that the terms of this undertaking are respected in full. Mr Le Fustec and Mr Clark have also expressed deep regret for      the failures of Alternate together with any loss and distress this has caused to investors.

4. Compensating the Alternate investors

4.1 The Commission, after having exercised all appropriate regulatory powers available to it in an effort to achieve compensation for      the investors, referred the matter to the States of Jersey for consideration. The Chief Minister’s Department subsequently issued      a press release on 23 April 2009. The press release can be viewed in full at the following web address:

5. The Commission

5.1 The Court made a number of observations and general comments in its judgment which impacted upon the Commission.
     Due consideration has been given to the comments of the Court and action taken by the Commission where necessary.

5.2 The Commission has sought to introduce various measures in an effort to generally improve the quality of investment advice      provided by investment businesses and to ensure that the Commission’s supervision of financial advisers remains appropriate.      Included in these measures were amendments to the Codes of Practice, the issuance of further guidance on suitability of      investment advice, recruitment of additional staff in the Commission’s investment business team and covert “sampling” of advice      provided by investment advisors, followed by the delivery of feedback to the investment advisors and their companies, commonly      called “mystery shopping”. A detailed report on the mystery shopping exercise can be found by visiting the following web address: The Commission also intends to launch a      programme of investor education in the future.

6. In closing

6.1 The regulatory regime requires that firms giving investment advice offer suitable advice and the Commission considered that not      only was the advice provided by Alternate unsuitable for the investors but that they had been misled. Alternate had its      registration under the Law revoked by the Commission. Mr Clark and Mr Le Fustec have also provided an undertaking that they will      not seek to act in any capacity that involves the giving of investment advice.

6.2 The Commission has sought to introduce various measures in an effort to generally improve the quality of investment advice      provided by investment businesses.

6.3 The Commission is of the view that highly geared investment products are suitable only for financially sophisticated investors who      fully understand the concept of gearing and appreciate the risks involved. Any investor, whether financially sophisticated or not,      should endeavour to have a full understanding of the investment products into which they invest. If an investor does not      understand a particular investment product, they should consider whether it is appropriate to invest in that product.

6.4 The key points from the Alternate case can be summarised as follows.

6.4.1 The Commission will always take action against any regulated person who provides reckless or misleading advice to         investors. Such action may include: (i) preventing the persons responsible from working in the finance industry;         and (ii) issuing a public statement giving details of any individual’s misconduct.

6.4.2 There is a need for the Commission to provide investor education information to the public (which, it is intended,         will be addressed).

6.4.3 Independent financial advisors must always act in the interests of the client and ensure that product risk is         thoroughly explained to the client.

6.4.4 Independent financial advisors must ensure the timely notification to their insurers of any potential claims against         them from clients, to prevent the voiding of any insurance cover.

6.4.5 The Commission must ensure the vigorous supervision of independent financial advisors and be prepared to not         only visit the offices of independent financial advisors and examine their files but also, where relevant, conduct         sampling of their services, by appointing experienced persons to covertly pose as potential customers which will         allow the Commission to assess the verbal contact between the financial adviser and customer.

6.4.6 Investors need to understand the risks associated with different investments and the benefit of spreading risk by         investing in different products. Investors should be encouraged to thoroughly research the risks associated with         a particular investment. Any investment proposal that involves borrowing could also involve substantially greater         risk, and investors should scrutinize such proposals with extra care.

6.4.7 Investors should not uncritically accept financial advice. They should ensure that they consider a detailed and         thorough written document from their financial advisor which sets out why the investment is suitable for them.         They should be prepared to seek a second opinion on the advice they receive.

6.4.8 Lenders should ensure that they thoroughly assess the ability of an investor to repay any loan made to
        an investor.

6.4.9 Lenders should be satisfied that the risks associated with specific products have been adequately explained to         investors before entering into loan agreements. Lenders should not solely rely on the financial adviser to explain         such risks.

6.5 Investors considering investing in geared products may wish to consider reading the Alternate judgment, which can be found at      the following web address:

Jersey Financial Services Commission
14 - 18 Castle Street
St. Helier

Contact: Barry Faudemer -

4 January 2010

1As defined in the Financial Services (Jersey) Law 1998, as amended.


< Back to contents