Coutts set to refund clients’ AIG borrowing costs - but doubts remain over lost interest

Clients of Coutts who were charged interest to borrow against money that has been parked in the AIG Protected Recovery fund are expected to be reimbursed if their compensation claims are deemed successful.

The news follows the completion of an independent third party review, which was instigated after the FSA imposed a £6.3 million fine on Coutts last year for failings in the way the AIG Enhanced Variable Rate fund. The bank will this week send out letters to clients letting them know if they will be offered redress in relation to the sale of the AIG product.

Coutts sold the AIG Enhanced Variable Rate fund to 427 high net worth clients between 3 December 2003 and 15 September 2008, including Sir Keith Mills, with investments amounting to £1.45 billion.

A run on the fund post-Lehmans led to it being suspended in September 2008, with 247 clients still invested. They were given the option to withdraw 50% of their capital and have the remaining 50% transferred into the new AIG PRF to avoid a 13.5% haircut. Coutts then offered to let clients borrow against the sum of money they held in the PRF at a rate of 1% over the base rate.

The FSA noted that of the 239 clients who opted to park money in the PRF, 46 took up Coutts’s offer.  Wealth Manager understands clients in this situation are likely to receive their borrowing costs back but the broader question of whether clients will receive interest on money left in the recovery fund is unclear.

The average client held £3 million in the original fund and previously a source estimated that total borrowing costs on money held in the PRF, charged at 1% over base rate, for the three and a half years in which the 46 investors have had their money locked up, could add up to just under £3 million.

A spokesperson for Coutts said the firm was unable to disclose whether clients would also be reimbursed for legal costs. They added: ‘As previously communicated, Coutts has been undertaking a past business review into Coutts’ sale of the American Life Insurance Company Premier Access Bond Enhanced Variable Rate fund. We are in the process of contacting clients to advise them of the outcome of the review of their file, and, where appropriate, making an offer of financial redress.’