PRESS RELEASE 16 February 2007

Commission wins case against Alternate Insurance Services Limited

On 16 February 2007 the Royal Court awarded judgment in favour of the Commission in 27 out of the 28 cases brought by the Commission against Alternate Insurance Services Limited (“Alternate”).

The Court agreed with the Commission’s submissions that 27 members of the public were recklessly misled by their financial adviser, Alternate. As a result, these investors bought high-risk investments believing that they were low risk and lost significant sums of money. The judge awarded a total of £1,564,128.56 to the investors to restore them to their previous position.

John Harris, the Director-General of the Commission stated, “The judgement shows that the Commission was clearly right to bring this case. As the judge commented, “the consequences for almost all of these investors was tragic.” The Commission has been pro-active in investigating 3 complaints and then widening the net to investigate the cases of all investors who were sold the product. In fact, many of the investors were not aware that they had been mis-sold the product, indeed many were not aware of the significant loan element forming part of the product and certainly not aware of its effect. The regulatory regime requires that firms offering advice offer suitable advice and the Commission was of the view that not only was the advice unsuitable for these investors but that they had been misled. Accordingly regulatory action followed and the Commission is pleased that its action has been successful and that investors have been awarded restitution”.

Mr Harris went on to state, “This judgment is not the end of this matter. We now have to do our best to recover as much money for the investors as possible. This will not be easy. As Alternate does not have any real assets, we will be exploring the options for recompensing the investors by bringing a case against the insurers in the UK and speaking with the lending institutions, Newcastle Building Society, Bank of Ireland and The Royal Bank of Scotland International, which were criticised by the judge.”

The Court was highly critical of the conduct of the two investment advisers Mr Clark and Mr Le Fustec. However, the Court approved of the settlement between Mr Clark, Mr Le Fustec and the Commission describing it as “appropriate”. Under the terms of the settlement both advisers have agreed to give undertakings to the Court preventing them from future involvement in the financial services industry. Under the terms of the undertakings they will not be permitted to act as a principal person in relation to any person or persons carrying on financial service business in Jersey or elsewhere and they will not be permitted to act in any capacity that involves the giving of investment advice. They have also expressed deep regret for the failures of Alternate together with any loss and distress this has caused to members of the public. Additionally the Commission obtained Affidavits of Means provided by Mr Clark and Mr Le Fustec in order to determine what would be an affordable contribution by them to be put towards the costs of future proceedings to recover monies for the investors.

The Commission believes that the undertakings given by Mr Clark and Mr Le Fustec will provide adequate future protection for the public of Jersey in relation to any financial service business they may otherwise have carried out.

The Commission accepts the Court’s recommendation that a full review is now made as a matter of urgency, so as to identify whether the regulatory regime can be strengthened still further and to learn as many lessons as possible from what the judge described as a “regrettable affair”. The judgment raised many issues to be considered by the Commission relating to compensation schemes, the registration process for financial advisers, professional indemnity insurance, and the scope of certain terms in the Financial Services (Jersey) Law 1998. The Commission is committed to considering each issue properly and promptly with full consultation before deciding if changes need to be made in addition to the courses of action open to it to attempt to recover as much money as possible for the investors in this case.

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For further information please contact:-

Helen Hatton
Deputy Director General
Jersey Financial Services Commission

Tel: + 44 (0) 1534 822020
Fax: + 44 (0) 1534 822002
Email: h.hatton@jerseyfsc.org

Notes to Editors

1 The case
The case was brought by the Commission under the Financial Services (Jersey) Law 1998 (“the Law”). Alternate Insurance Services Limited (“Alternate”) is a registered person under the Financial Services (Jersey) Law 1998 authorised to give investment advice. The principal persons of Alternate were Mr Douglas Clark and Mr Robert Le Fustec.

The Commission received complaints from 3 members of the public in relation to financial products which they entered into as a result of advice given to them by Alternate. These products were known as Traded Endowment Investment Portfolio Plans (“TIPPs”).

A TIPP typically involves the purchase by the customers of a portfolio of second hand endowment policies. To enable investors to invest in a bigger portfolio than they would otherwise be able to afford, the TIPP product includes the step of borrowing significant sums which are added to the investment. Whilst this approach enables additional endowment policies to be purchased, it also has the effect of increasing the risk to investors who have to repay the loan regardless of the performance of the policies. Investors can therefore lose more than they invested. This was the heart of the problem in this case both in terms of increasing risks to investors but also because the existence and effect of the loans was not understood by the purchasers.

The Court found that these products were highly unsuitable for the particular investors in this case as they wished to purchase low risk products but were sold high-risk products. The lending institutions in this case were the Newcastle Building Society, Newcastle, the Bank of Ireland, London, and The Royal Bank of Scotland International (Guernsey branch).

All investors should be extremely cautious before investing in products which involve borrowing money. “Gearing” can increase potential returns but also increases risk.

2. Compensation Schemes
The FSJL does include an enabling power for the States to issue regulations to provide for a compensation scheme where appropriate. Whilst using this provision remains an option, either for a "lifeboat" scheme for Alternate investors or for a standing compensation scheme, the Commission is currently focusing first and foremost on recovering monies from the insurers. However, the Commission will take recommendations to Government outlining possible regulations for consideration should either a "lifeboat" scheme or a standing compensation scheme appear necessary.

3. Insurance
The Court recommended that the Codes of Practice should contain stronger terms that are binding on insurers to prevent insurers voiding policies of insurance for reasons such as late notification. In response, the Commission is committed to considering how best to implement the recommendations of the Court. However, this change will depend on insurance companies being willing to offer such insurance to Jersey businesses and inevitably further consultation will need to take place before the Commission can categorically state how effective changes can be implemented in this area.

4. Effectiveness of Regulation
The judgment demonstrates that where investors are mis-sold products as a result of false and misleading statements that are reckless, effective regulatory action will be taken by the Commission. However, the judgment also indicates that the present regulatory regime offers less protection to investors than that available in the UK, and proposes that the Commission should be able to use its restitution powers in cases less serious than those involving recklessness which is a high legal test to meet. The Commission is committed to addressing this issue in reviewing the lessons to be learned from this case.

The judgment refers to standards of competency amongst advisors and although the regime does demand mandatory experience and qualification requirements, the Commission will review whether, in the light of lessons learned and the increased complexity of financial services, these need to be raised.

5. Financial Services (Jersey) Law 1998 (“the Law”)
Additionally the Court expressed concerns about the drafting of the Law in two areas. The Court thought that the definition of “transaction” could be made more precise in Article 26 and that the scope of Article 24 should be clearer. The Commission will carefully consider these issues and put forward recommendations for change to the States in these areas.

6. Principal Persons
A Principal person is a defined term within the Financial Services (Jersey) Law 1998, broadly speaking it refers to people who either control more than 10% of the shares in a regulated business, or people who act as directors of a regulated business.

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