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Why did the FCA ask DFM Greyfriars to stop taking in new money?

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Why did the FCA ask DFM Greyfriars to stop taking in new money?

Yesterday New Model Adviser® revealed the Financial Conduct Authority (FCA) told discretionary fund manager (DFM) Greyfriars Asset Management to stop taking in new investments into its discretionary portfolios.

The note on the FCA register said Greyfriars must: ‘Cease carrying on managing investments regulated activity in respect of new money; this includes cease accepting any new money into the Greyfriars Asset Management Portfolio Six on a permanent basis.’

When contacted, Greyfriars told New Model Adviser® it agreed this move to stop taking in new investments with the FCA.

'Greyfriars Asset Management made the decision in mid-September to cease accepting any new business into the Portfolio Six service. The FCA were always aware of our decision and we are in an on-going dialogue with them in managing this,’ a statement said.

'We are also reviewing our DFM business and therefore until we have completed this review we will not be accepting any new business within our DFM service.'

The FCA said it could not comment further, but there are clear questions as to why the regulator asked Greyfriars to restrict new investments into its discretionary service.

What is in Portfolio Six?

Although it does not specify the reasons on the note, the FCA specifically mentions an offering called Portfolio Six.

According to a brochure released by Greyfriars, Portfolio Six is a discretionary managed investment portfolio made up of ‘non-correlated investments’ including corporate bonds. It targeted annual returns of 8-10% per year and had a minimum investment of £10,000 through a Sipp using the Novia platform. A recent update said it has over 1,000 investors with £40 million under management.

An update to investors in November (taken down yesterday) from Greyfriars shows a number of the mini-bonds which Portfolio Six is comprised of.

Among the investments in the portfolio listed in that document is The Olmsted Series, a three-to-five year bond based around investing in real estate in the south east of the United States.

Also mentioned is Lanner Car Park Bonds, which targeted a minimum of 6% interest rate over a five year term. The document said funds were to be used ‘as capital for the acquisition of car park assets’.

Also in the list was Cape Verde-based The Resort Group. The Greyfriars literature said: 'Investments in Resort Group Corporate Bonds (TRG) III will fund the development of hotels and resorts in emerging markets. TRG III provides interest payments of 7% per year, paid quarterly.'

Mini-bonds

Many of these investments are understood to be mini-bonds. 

Last year Duncan Pickering, investment manager at Greyfriars Asset Management, told Citywire that Portfolio Six held mini-bonds. 

He said: 'What makes Portfolio Six different are the mini bonds it holds. Many of these are provided by Best International Group and they are bonds that help raise money for entrepreneurs and smaller businesses and generate income for investors.’

In 2012  Greyfriars Asset Management was acquired by Best International Group. 

Mini-bonds are short-term loans to companies that pay annual interest. Mini-bonds cannot be traded on the stock market and are not covered by the Financial Services Compensation Scheme (FSCS).

Mini-bonds have come under heightened scrutiny in recent months. In September the Telegraph reported that around 1,000 investors face losing £8 million after issuer Providence Bonds went into administration. 

Asset classes

In promotional material from Greyfriars it claims Portfolio Six only contains ‘standard investments’, as set out by the FCA paper PS14/12. Having standard investments, Greyfriars said, has benefits to advisers as they may not need special authorisations and professional indemnity (PI) cover, and could also lower the capital-adequacy requirements for Sipp firms.

However since the PS14/12 paper, the FCA has changed its definition of what a standard investment is.

In the PS14/12 paper paper, it says corporate bonds, which most of the investments within Portfolio Six are, are standard assets. But in the FCA paper CP15/19 released in June 2015, the regulator proposes changes to this definition to ensure for them to be standard, corporate bonds need to be on a regulated venue, meaning a recognised stock exchange somewhere.

‘As such, we propose to remove corporate bonds from the standard asset list, to capture quoted corporate bonds, which are covered by this new wording,’ the FCA paper said.

One compliance expert, said he did not think the mini-bonds are listed on any stock exchanges, and Greyfriars did not respond when asked if the investments were listed.

It is possible this change in regulation over corporate bonds could have been a factor, and if the assets were non-standard, then the PI, authorisation and capital adequacy benefits would not have been applicable for advisers and Sipp firms.

What happens next?

One compliance expert said Greyfriars' decision to close its DFM service could prompt advisers to try and get  investments out for clients.

However if there are problems with liquidity, particularly if a lot of advisers try and redeem at the same time, then this could create further problems.

The Portfolio Six offering was sold through advisers and if there are liquidity issues, then this could at some point down the line create claims which could then ultimately fall on the FSCS.

Graham Bateman of Greyfriars said the Portfolio Six 'was only available via IFAs and not direct.

'We are liaising with IFAs to ensure that there is no client detriment and that all customers are treated fairly,' he said.

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