It was just a ‘normal financial services company’, a former employee at five-man advice firm Cherish Wealth Management in Solihull said.
Yet nine years after it was founded the firm has collapsed, landing the Financial Services Compensation Scheme (FSCS) with a bill worth £6.7 million and rising.
The figures are remarkable for such a small firm. The FSCS has paid out £6.7 million from 229 claims, including 188 Sipp claims, over Shah Wealth Management, Cherish’s principal, and is processing a further 357 claims, including 300 Sipp claims.
The Financial Conduct Authority (FCA) was made aware of Shah Wealth Management and Cherish six months prior to it going into liquidation. A former client wrote to the regulator saying the firm was not providing information about its case to a claims management firm the client was using (the claims firm Get Claims Advice later bought Cherish’s database from the liquidators for £100,000).
Despite this letter, the FCA did not intervene, nor did it use its data collection to identify an issue.
The FCA noted in the FSCS funding consultation a third of all FSCS claims from 2013 to 2016 were linked to the sale of non-mainstream pooled investments by regulated advisers.
The regulator also said: ‘We recognise that the redress bill might be reduced through increased supervision and enforcement.’
Cherish Wealth Management advised on a vast number of unregulated investments, and since it entered liquidation the FSCS has paid out £6.7 million. To put that figure in context, the total FSCS levy for life and pension advisers was £126 million last year.
How was one small firm responsible for 5% of advisers’ life and pensions FSCS bill? New Model Adviser® finds the answer raises questions about the way the FCA is monitoring and regulating the advice sector.
The Cherish story
Cherish Wealth Management was co-founded by Steven Wright, a former policeman according to his now-changed LinkedIn profile, in 2008.
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It became authorised with the FCA through its principal Shah Wealth Management from 2010. However, Wright said the firm did not trade until November 2011 when he resigned as a director and sold his shareholding.
Between 2012 and 2014 Wright, along with his business partner, created a number of mainly overseas-based property investment schemes (see chart). These included Brisa Investments, Lakeview UK Investments and Real Estate Investments USA.
According to Companies House these investments have collected millions in deposits from investors, some of which was lent on to other companies. Wright resigned his directorship from these schemes in the months prior to him being declared bankrupt by HM Revenue & Customs (HMRC) on 28 March 2017.
In 2014 (when Wright was not a director of Cherish according to Companies House) a suitability letter showed Cherish recommended a client invest in three investment schemes (Brisa Investments, Lakeview UK Investments and Real Estate Investments USA), all of which Wright created. The client was charged initial fees of 5%.
Another scheme created with Wright’s involvement was US housing scheme InvestUS Exit Strategy. This ran into litigation disputes and has left investors without interest payments for over two years.
Regarding the other recommendations, Wright said he was ‘not privy to Cherish’s advice or charges to its clients’ as he was not at the firm at that time.
‘Decisions about its investments in any product it selected, in accordance with the rules that apply to a regulated financial services company, were clearly its own decisions. If Cherish failed in those duties, it has nothing to do with Wright,’ a spokesman for Wright said.
Wright has previously said ‘not all the investments underperformed’.
Part of the way Cherish gained clients was through relationships with unregulated introducers. One of these was called Avacade, which passed some clients to Cherish.
Avacade also introduced clients to both the Ethical Forestry and InvestUS schemes.
In March 2017 the Serious Fraud Office (SFO) opened an investigation into the Ethical Forestry scheme. As part of that inquiry the SFO is asking investors if they were contacted by Cherish and Avacade in a questionnaire.
What does it mean?
The story of how one advice firm is responsible for such a large percentage of FSCS claims shows there are holes in the FCA’s regulation of the advice sector.
According to Phil Young, managing director of compliance consultancy firm Zero Support, the FCA needs to increase its supervision resources to stop something like this happening again.
‘Advice supervision is relatively thin on the ground.’ He said. ‘Even large advice firms can go for 10 years without anyone [from the FCA] physically going on site. Most advisers would like to see more supervision of firms, something that is preventative.
Young said that regardless of FSCS reforms, a ‘significant value of claims’ will come from firms where clients have been invested in riskier assets.
The FCA does see annual data from advice firms through returns to its online Gabriel system. But according to Young it is not using this in the right way to stop advice firms that cause the most amount of claims.
‘You would think this sort of stuff would get picked up but it’s a resources issue. The FCA is looking at data and thinking about how it can work smarter with it. But it needs to understand what is the most relevant data. You can end up with too much data at times.
‘The other issue is the reliability of the data and how up to date it is, which is always questionable. What is the best source for that data? It might not be from advisers.’
The FCA declined to comment when the points over Cherish were put to them.