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Standard Life fights off insurers' appeal over £100m Sterling payout

by Daniel Grote on Dec 18, 2012 at 11:09

Standard Life fights off insurers' appeal over £100m Sterling payout

Standard Life has successfully fought an appeal by professional indemnity insurers against a court ruling they should cover the life company's £100 million payout to Sterling fund investors.

Standard won a court battle against 11 professional indemnity insurers in February, arguing their policies should have covered the losses it incurred on asset-backed securities held by its Sterling fund.

The insurers appeal the decision, but the appeal has been dismissed, with Standard Life awarded its costs related to the appeal. The insurers now have 28 days to decide whether to appeal to the Supreme Court. If an appeal is granted, Standard said it was unlikely the case would be heard before autumn 2013.

The fund lost 5% of its value in early 2009 due to its holdings in asset-backed securities, despite being marketed as a 'cash' fund. The losses sparked outrage among advisers and investors, who said marketing material had been misleading.

Standard bowed to pressure by injecting cash into the fund, and last year was fined £2.45 million by the Financial Services Authority, which said it had misled investors.

17 comments so far. Why not have your say?

Paul Shoard

Dec 18, 2012 at 11:38

Which part of 'Professional Indemnity Insurance' did the insurers not understand?

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James Clancy

Dec 18, 2012 at 11:38

Investment tip.

Look for Lloyds syndicates that offer PI insurance to the financial service industry .They going to have a field day over the next few years.

You will get better returns from those syndicates than those just offer car or house hold insurance! I

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John Burchett

Dec 18, 2012 at 11:45

Dubious

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Simon Jenkins

Dec 18, 2012 at 12:10

It will be intersting to see Standard Life's PI renewal terms, if they get offered them!

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David Craik

Dec 18, 2012 at 12:16

Did Capita or Arch or Keydata or Lifemark not have to carry similar PI cover?

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Green Eyed Monster

Dec 18, 2012 at 12:21

No David,

Friends of government / FSA aree exempt.

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Man of Kent

Dec 18, 2012 at 14:40

@ Paul Shoard - I think the part of 'Professional Indemnity Insurance' that the PI insurers got confused about was 'Professional'. The court's decision allowed Standard Life to market an asset-backed fund, with its inherent risks, as cash and then escape the financial consequences. Some might call this 'reckless abandon'. If Standard weren't aware of the difference between the two, should anyone entrust investments to them?

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Richard Hardy

Dec 18, 2012 at 14:58

Will this result in yet another hike in adviser PI costs?

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David Craik

Dec 18, 2012 at 15:04

@Man of Kent - You are quite right but had it been a Capita fund, then the pay outs would be from the IFA community not from the provider.

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Paul Shoard

Dec 18, 2012 at 15:33

@Man of Kent - I agree with your comments, but larger financial institutions than Standard Life were also guilty of thinking mortgage backed securities were just another form of cash! After all they were trying to be a bank as well at the time.

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richard john brydon

Dec 18, 2012 at 18:52

Threadneedle UK Money Securities Fund. Floating Rate Notes did it for this fund. My efforts to complain were turned down and then the fund was wound down. Low risk? It went down 20% almost overnight.

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Ian Lees

Dec 19, 2012 at 10:01

It appears the dictators at Standard and Strife - did not have a " Level four qualification or MLIA dip or an o level between them - when they were fined £2.45 M by the Fickle Services Authority. Where did that come from ? and it is interesting that Hector joins Barclays Bank for a £ 3M salary I wonder how good he really is at fixing interest rates and covering up complaince - after all he apparently wasn;'t very good at identifying corruption and fraud whilst incharge of the fickle services autonomy ?

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Alan Smith

Dec 21, 2012 at 16:15

I fail to see how anybody can criticise Standard Life here. They messed up, admitted they had messed up, paid up and then claimed on the insurance policy they had in place to cover their muck ups, just as Insurance cover should be. The P.I Insurers should have been well aware of the risks they faced when insuring Standard Life.

Compare this to how CAPITA crawled under a rock when they realised their errors in the CF Arch Cru Scandal and then got their Lawyers Herbert Smith to negotiate a cozy deal with FSA whereby FSA pass blame onto IFA's and ultimately the FSCS where all advisers pay.

There would have been a bigger outcry had Standard Life let this fall on advisers shoulders which considering the CF Arch Cru outcome I'll bet Standard Life and their P.I insurers wished they had just said at the time "it's the IFA's fault".

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Alan Smith

Dec 21, 2012 at 16:16

Quoted directly from the ACD’s Annual Short Report produced by CAPITA Financial Group every six months from June 2007 to June 2009 “There are no borrowings or unlisted securities of a material nature and so there is little exposure to liquidity risk” – yet the FSA and CAPITA would have the outside world believe liquidity issues caused the failure of the CF Arch Cru funds.

Quoted directly from the Prospectus produced by CAPITA Financial Group:-

“CF Arch Cru Investment Portfolio is suitable for those investors wanting to achieve consistent returns, wealth preservation and capital appreciation by investing in a broad range of collective investment schemes, transferable securities, both Corporate and Government bonds, money market instruments, cash, derivative instruments, forward transactions and other instruments that the investment manager considers to be appropriate from time to time.”

This is not a third party opinion as alleged by FSA and who are using Seymour V Ockwell as justification for the S404, rather it is a statement of fact from those legally responsible for the fund. I think the key words here are BROAD RANGE – nowhere does it say over 20% in one investment in a Greek shipping company.

Therefore there was clearly misinformation given by the ACD CAPITA Financial Managers and the ACD has legal responsibility for all affairs of the fund such as information provided by Arch Financial Products LLP and CRU Investment Management. Mr Addenbrooke of CAPITA Financial Managers Ltd stated this in 2008 in an interview with a trade paper.

Ironically just this week there has been reporting of a case that is almost identical to the CF Arch Cru debacle yet no client has had to wait for their money back (now nearly 4 years for CF Arch Cru Investors).

I refer to the Standard Life Sterling Pension fund that fell in value almost overnight by £100million in early 2009. Within a month Standard Life accepted the fund had been mis-marketed and injected £100million into the fund so no client lost money and informed every investor they had two months to get out of the fund penalty free after that date if still invested the client would be accepting they were aware of the extra risks the fund did have following production of correct marketing material.

Subsequently Standard Life went to their PI Insurers and recouped the £100million as the incompetence that had resulted in the mis-marketing which led to investors being invested in the fund was Standard Life’s incompetence and after all that is what PI is meant to cover.

Obviously Standard Life’s PI Insurers did not like this but their appeal to not pay has been unsuccessful.

Standard Life were fined (and paid) over £2million by the FSA.

Why therefore did CAPITA Financial Managers do exactly as Standard Life did – make up the investors losses immediately in 2009 and allow investors to leave if they did not like the risks when the true nature of investment operandi was provided to them.

CAPITA Financial Managers PI would have had to pay out and if subsequently the PI Insurers wanted to take the Legal Action currently being undertaken by Hugh Aldous against various parties then that would have been their prerogative. However these actions would have taken place behind closed doors and investors would not have suffered the loss for nearly 4 years.

The above behind closed door deals would have been much palatable than the sordid behind closed door deals that the FSA have obviously been undertaking with CAPITA, Guernsey Authorities and Government Ministers.

If anybody would like more information about the true goings on regarding CF Arch Cru they can request from the FSA a copy of my response to the Section 404 consultation which the FSA have to release to those requesting a copy, once having read that if they want to contact me further I will send them even more revealing information.

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Alan Smith

Dec 21, 2012 at 16:17

As stated in my post above I believe it is an absolute disgrace that investors have had to wait nearly 4 years for the FSA to put a scheme in place where investors will get their money back. Yet even after 4 years it is a scheme that is so perverse that many investors will not be covered such as those who were high risk, those who invested directly without using an adviser and those using discretionary fund managers.

Those investors that are covered will end up receiving compensation either from an IFA that they do not “blame” for the loss otherwise the investor would have just complained via FOS during the last three years or alternatively (and more likely) an IFA the investor does not even know because the claims will fall on the FSCS.

The FSA are living in cloud cuckoo land if they think only 15%-30% of investors will opt in to a redress scheme. Most investors have waited and not complained because it has been so obvious to them as to who and what caused the loss of money that they naively believed the FSA would eventually put a solution on the table where the true culprits paid out. Unfortunately this has not happened and they are faced with only one choice to complain against their adviser they will take it.

This is also true for advisory firms that have already gone into default over CF Arch Cru. The FSCS had until a few months ago received relatively few claims (around 600), this has now swelled to over 1800 as a deluge of investors thought they could wait no longer and accepted CAPITA’s compensation offer.

Once the compensation offer has been accepted the investors have basically accepted the FSA will not come up with an honourable solution.

The S404 implementation confirms to the investors of defaulted firms the FSA’s intentions and therefore the FSCS will be flooded with complaints from investors of departed firms who again have waited for the FSA to get them compensation from those they know caused the losses, however as this will now definitely not happen they are left with no choice but to go to the FSCS.

Therefore IFA’s should prepare for an FSCS bill next year of at least £100million from CF Arch Cru alone.

No doubt Connaught will also fall on the FSCS next year – another fund where CAPITA and FSA conspired on when changing operator of the fund in 2009 when they knew there was a problem but did nothing and allowed a new operator to launch further funds.

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Alan Smith

Dec 21, 2012 at 16:17

Whilst writing the last two posts I have thought of a plan so cunning you could stick a tail on it and call it a weasel – or the FSA if you prefer.

The FSA’s logic on who is responsible for CF Arch Cru compensation is so irrational if it were applied to the banking collapse then anyone who held a bank deposit and had an IFA should complain against the adviser for the loss they have suffered. After all the adviser’s should have been aware of the mis-management that was going on within the banks and their imminent collapse. All depositors have lost money but as it was not directly lost they cannot work out how much exactly!

The Government decided the banks were too big to fail just as the FSA decided CAPITA Financial Managers were too big to fail – although it is perfectly acceptable for 200 plus advisory firms to fail.

If you consider the actual bank bailouts and subsequent quantitative easing which has resulted following the bailout has cost over £1trillion pound which is more than £40,000 for each tax paying adult in the UK it is scandalous that only 1 banker – Peter Cummings – has been censured by the FSA.

But hey we are all tax payers in this together, or are we? When you consider that Mr Average on £25,000 per annum and a few thousand in the bank probably pays more tax than the likes of Sir Philip Green the notion of proportionality and responsibility are thrown out of the window.

Given the above logic here is the cunning plan.

CF Arch Cru has shown that any fund with CF in front of it will not have action taken against it for over 3 years and when there is action no fines will actually need to be paid. The FSA enforcement notice shows that CAPITA Financial Managers Ltd are ACD for 231 funds with just shy of £20 billion under management. The 231 funds are split between around 100 fund management groups.

5% of £20 billion gives £1 billion. Therefore why don’t the 100 fund managers just buy the 200 IFA firms for £1billion with no independent valuation on any of the 200 IFA firms – indeed just pay a flat £5million for each IFA firm regardless of size.

The 200 IFA firms who now have £1billion in the bank can repay investors the £100million leaving them £900million. Before buying the IFA firms the fund management groups would obviously have put an agreement in the purchase arrangement that stated that in return for not bothering to get a valuation on the business they were buying on behalf of investors then the fund managers would be entitled to a “transaction bonus” of £300million giving each management group £3million for a Christmas knees up.

Leaving £600million for the 200 IFA firms so they get £3million each to walk away into the sunset and enjoy a peaceful life without the FSA having to worry about them.

In 3 months time when the fund management groups admit there is no value in these IFA firms as all the staff are sitting on a beach in the Bahamas and Winterflood Securities the market maker says there is no secondary market, luckily the fund managers will have to report only a 5% fall in investors fund values but as this will have been within the investors capacity for loss as documented by all the advisers that recommended those 231 funds in the belief that the fund managers did not operate as Arch Financial Products did.

The above is obviously farcical, but no more farcical than the FSA’s handling of this disgraceful fiasco.

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Ian Lees

Dec 21, 2012 at 16:31

Hats orf to Standard Life - they saw their errors and paid up - but where did their money come from ? High Charges on EPPs and pension funds ? paper transaction ? Rememebr what happened to those "Mutual Shareholders " - with the with profits policies ? It does seem to be a bit " Robbing Peter to pay Paul ", or the FSA . Standard Life are acting a bit like Starbucks and their non payment of tax - until identified in the press - then in a sweeping gesture to gain the remnants of credibility - they make an offering.

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