PRESS RELEASE 16 February 2007
Commission wins case against Alternate Insurance Services Limited
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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1 The case
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
4. Effectiveness of Regulation
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”)
6. Principal Persons
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