Clients who spent over three and a half years with their money parked in the AIG Protected Recovery fund have spoken of their frustrations with Coutts’ handling of the AIG compensation process, with one client offered less than 0.25% in lost interest over the period.
The payment follows the completion of an independent third party (ITP) review, which was launched after the FSA imposed a £6.3 million fine on Coutts last year for failings in the way the AIG Enhanced Variable Rate fund (EVRF) was sold.
‘The attitude that has come across to me from Coutts has been one of “this is it” and a “take it or leave it” scenario. My private banker does not know what is happening,’ said one disillusioned client who had just under £500,000 in the AIG Protected Recovery fund (PRF).
Following an offer for less than £1,000 in compensation – equating to an average interest rate which is less than 0.25% - the client is seeking legal advice and plans to go to the Financial Ombudsmen Service (FOS).
In a letter seen by Wealth Manager, Coutts said the ITP had viewed the bank’s Private Reserve Deposit Account – which currently has a gross yield of 0.45% per annum for investments under £1 million – as an ‘alternative suitable product’ and a proxy for a spread of appropriate deposit accounts prior to March 2009 when the PRF was opened.
However, the client argues they would not have opted for such a low rate at the time and anticipates they could have received an average rate of 2% with other organisations during the lock-up period.
While Coutts gave the initial advice to invest in the AIG fund, the client opted to borrow against the money locked up in the PRF through another bank, but is still waiting to hear if reimbursements for borrowing and legal costs will be received.
A spokesperson for Coutts said it was difficult to comment on specific calculations as compensation has been offered on a case-by-case basis conducted independently by the ITP with an FSA-agreed methodology.
‘The key is that where the ITP reviewer could not, from our records, confirm that the sale was suitable, then Coutts will ensure that where a client has experienced a detrimental result, that they will be put back to a position as if they had not invested in AIG, but had invested in an alternative suitable product for their risk appetite and circumstances,’
A run on the EVRF post-Lehmans led to it being suspended in September 2008, with 247 clients still invested. At the time 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.
Another client who borrowed against his PRF money through Coutts - and amassed over £160,000 in borrowing costs at 1% over base rate between late 2008 and July 2012 – has not yet heard whether redress will be received, having initially been told he would receive a letter early last week.
‘This has been going on for four years with AIG and over the past few weeks when it has come to a head, Coutts can’t even organise it properly,’ he said.
He has been told that he could face a further three-week wait for AIG to return his money - which is in the millions - and highlights a potential further loss of interest.
While the client has concerns about the tax treatment of any reimbursement of borrowing costs, Robert Morfee, a lawyer at Clarke Willmott who has been working with a number of private clients that have exposure to the AIG fund through several banks, told Wealth Manager he anticipates it should not be liable for income tax, and while capital gains tax (CGT) could be chargeable, he pointed to numerous exemptions on damages payments in English law. ‘In practice, no-one ever pays CGT on damages,’ he said.
When was loss crystallised?
Coutts declined to shed any further light on whether the compensation calculation was based on the time the PRF was formed to July 2012 or whether it applies to when the client first invested in the EVRF.
Morfee said that compensation or legal claims could also depend on which date it is agreed that losses were crystallised.
If the argument put forward by the bank is accepted, losses would be crystallised in July 2012, when the PRF returns 100% of the remaining 50% of the initial AIG fund investment. However, if Clarke Willmott’s argument is accepted, the PRF would be viewed as a new investment in itself and losses would have been crystallised in December 2008 when the EVRF's value fell sharply – meaning clients could claim for a greater sum.