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AJ Bell's Doran: the Barlow Clowes effect 30 years on

AJ Bell's Doran: the Barlow Clowes effect 30 years on

It was May 1988. The FTSE was struggling to get above 1800. UK government bonds yielded a whisker under 10%.

A different world from the one we see today, but a world that was to be rocked by the winding up of one of the most successful investment funds of its time. 

With more than 11,000 investors on its books, the Barlow Clowes investment scheme was a giant of the industry; a scheme with an inevitable track record that didn’t receive a single complaint from its investors. But all built on lies.

As the High Court passed down its ruling to wind up the scheme 30 years ago, the truth had been outed. Facing claims of £190 million against them and with only £67 million of assets available, the source of Peter Clowes’s wealth, which stretched to Lear jets, a vineyard in France and a cottage in the Peak District became all too clear. 

Greed had taken a grip and the UK had its very own Bernie Madoff, long before Bernie had got going.

The consequences were immediate and long lasting. Having fought doggedly against the notion of compensating investors in Barlow Clowes, the government eventually rolled over on this position in 1989, agreeing to compensate the first 90% of all investments less than £50,000, thanks to the haranguing of a young upstart in the Labour party representing Sedgefield. 

Setting a precedent which lasted all the way until the credit crisis, the scandal not only reformed deposit protection but would also see radical changes in regulation thanks to the perceived failings of the Department of Trade and Industry (DTI) in their role as financial watchdog. Enter the world of the self-regulating organisations – the forerunners to the now FCA.      

At fund level, unsurprisingly, the scandal led to increased investor protections. The role of depository was transformed to ensure the safeguarding of investors' assets.

With ultimate oversight of the fund manager and with a legal separation to remove any conflicts of interests, the depository’s position in the fund management industry is one rarely given any attention, in the same way that the best football referees are never heard to blow their whistles. 

And so, the question must be asked: could it happen again? 

Well, history tells us never to say never. But investor protection that is in place is set at £50,000 for authorised funds (even though ETFs wouldn’t qualify for such protection). And the truth is, thanks to the well entrusted and deeply enshrined principles that were etched into the industry by virtue of Peter Clowes’ exploits, the ring-fencing of assets, the independent oversight and constant challenge to fund management groups that comes from the depository system, renders that investor protection almost appendix-like in nature.

As we mark the 30 year anniversary, it pays us to recall that those who cannot remember the past are surely condemned to repeat it.

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