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Structured product provider NDFA was advised that both the courts and the Financial Services Authority would likely hold it liable for investors' losses due to "negligence and misrepresentation" in the marketing of its Lehman-backed plans, just weeks before it entered administration.
Documents seen by IFAonline reveal NDFA was told by its legal counsel in mid-September 2009 that the regulator would likely find marketing material for both its 'Capital At Risk' and 'Capital Secure' products broke FSA rules that promotions must be fair and not misleading.
A court hearing any civil claims against it would hold NDFA liable for investors' losses, according to the unnamed law office.
The assessment - which Grant Thorton, administrators for the failed firm, has said it will also apply to all NDFA creditors when the firm enters liquidation - is in stark contrast to the official stance of both NDFA and the Financial Services Compensation Scheme (FSCS).
On 21 October 2008, NDFA complaints handler Karen Baker wrote to one investor denying there were any problems with the firm's literature.
"I do not see any grounds from the results of our investigations to believe that this company has been negligent in any way. Nor do I believe that the company has failed to comply with the applicable FSA regulations, or has failed in a general sense to treat our customers fairly," the letter said.
It continued: "We reviewed the plan documents fully and carefully. We are satisfied that the plan documents comply with the requirements set down by the FSA."
The FSCS ruled last September Capital at Risk investors would be barred from compensation because the relevant marketing materials provided "adequate and appropriate" warnings there was a risk to investors' capital if the organisation backing the products - Lehmans - failed.
Grant Thornton said it had made the FSCS aware of the assessment from NDFA's lawyers.
It includes advice that it is "very likely" the Financial Ombudsman would find the majority of complaints in favour of investors, make money awards against NDFA, and once the FOS had determined existing complaints a significant number of new ones would follow.
NDFA went into administration on 14 October 2009, a month after receiving its lawyers' opinion, saying only that the decision was due to liabilities arising from the collapse of US investment bank Lehman Brothers in September 2008.
Investors complained NDFA's literature did not make clear in a way that was fair and not misleading that they risked losing some or all of their capital invested, or that the counterparty was not a UK bank.
They also said NDFA failed to stick to a condition in the literature that their investments would be made with a Standard & Poor's A* rated bank, by continuing to invest with Lehmans after S&P downgraded it from A* to A.
According to members of an NDFA investor action group, the FSCS has now begun paying compensation for some Capital At Risk products.
However the latest NDFA update on its website refers only to compensation for Capital Secure investors, and the action group has accused the scheme of deliberately failing to publisise the recent payouts.
NDFA could not be reached for comment. However Grant Thornton confirmed the firm had received the legal warnings prior to the administrators taking control.
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| Comment | Revealed: The warning that sealed NDFA's fate |
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Badly handled by FSCS
FSCS made a poor judgement back in 2009/10 and has been trying to cover its tracks ever since. We now have some investors compensated, whilst others with exactly the same product have been denied compensation. Most don't even know they can claim, thanks to the FSCS announcement in October 2010 designed to discourage claims. Anyone with an interest in this, please visit the action group website missoldinvestments.co.uk
Posted by: Missold
Counsel's opinion
Well done Laura for ferreting out this most revealing information. What is needed now is for someone - a whistle-blower at FSCS, perhaps, dismayed at their employer's unjust treatment of ancient investors who have been cheated out of their ostensibly low-risk NDFA investment - to publish FSCS's counsel's opinion on which FSCS rely to justify their assertion that Capital-At-Risk investors received adequate and appropriate warnings in NDFA's literature of the possibility of counterparty failure. My suspicion is that this opinion will be flimsy indeed; how convenient it is, therefore, for FSCS and the IFAs who fund them that FSCS is exempt, under the Freedom of Information Act, from being obliged to disclose their reasoning if asked. How convenient for them, and how unfair to the investors they are paid to serve.
Posted by: Boyd Simpson
Saving a levy
Desperate to save another levy, someone at the FSCS came up with the counterparty idea, which their Counsel backed. So why are the FSCS compensating some "capital at risk" plans?. Someone did a sloppy job and the top brass do not have the honesty to put matters right.
Posted by: Oxo
Justice for the underdog
A big thankyou to Laura Miller for highlighting this information and in total contrast to the stance of the FSCS, who, for whatever flawed reasoning refuse to acknowledge the body of opinion, that all NDFA products were missold. For NDFA,s council to come rapidly to their decision is indicative of it,s obvious truth. The financial institutions involved were not sticking to the rules of the FSA and breached them on several levels, so it is incumbent on them to put things right and that means compensating the victims of these misold products.
Posted by: Maurice Vleugels
Investment Risks
If NDFA had explained the Risks in the way that Lehmans did in their EU required Prospectus, they would have been highly unlikely to have risked their money. The Issue is clearly not suitable for the 'private' investor as the product is extremely complex and lacks any guarantee as to Capital security. But, of course, investors did not read it, because they did not know that Lehmans was involved.
Posted by: Observer
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Non so blind as though who will not see
FSCS, obdurately rejects all arguments and claims that a repeated statement in NDFA's letters and its Brochure which unequivocally says that risk to loss of capital is limited by the possible fall of 50% of the FTSE100 and/or Eurostoxx50, over a 5-year period. NDFA said the same thing in media interviews. The investment by NDFA was with Lehmans, but was kept secret, because that was what Lehmans wanted, as it saw the impact of the Prospectus Directive as an obstacle to its marketing. The Directive is designed to let investors know who they are investing with, i.e the name, and who insures the investment, on a 'warts & all' basis. Lehmans insured itself, which FSA says must not happen. The risk warnings in compensated and rejected claims are identical. NDFA happily invested clients' money with Lehmans whilst the financial media and professional commentators and finacial indeces, were awash with reports and statistics making it as clear as day that Lehmans was in trouble, with its share price falling at an incredible rate. Lehmans were closing funds; and off-loading staff by the thousand. Who in their right mind would have invested in a US bank in early 2008, when the US financial industry was floundering amongst 'toxic' debt? Who would invest in a 5-year Plan in a bank which was collapsing like a pack of cards? I suggest that the answer is no-one, no-one who knew where their money was going that is. But FSCS claims that investors wer not entitled to know where their money was being placed. That's not the way I read the law- but perhaps FSCS knows better?I'm just a simple country boy, so what would I know?
Posted by: Pursuer