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Last Updated: Wednesday, 1 September, 2004, 11:20 GMT 12:20 UK
IFA firm banned for mis-selling
Coins
An estimated 250,000 people have invested in precipice bonds
The Financial Services Authority has banned independent financial advice (IFA) firm David M Aaron Ltd from doing business after it mis-sold investments.

This is the first time the FSA has banned an IFA for mis-selling products.

The city watchdog found that the firm "actively downplayed" the risks attached to investing in precipice or high-income bonds.

Nearly 8,000 customers invested in the bonds and some have lost almost two-thirds of their original savings.

'Misleading'

Precipice bonds offer the prospect of a high rate of return.

This is one of the most serious cases of mis-selling that the FSA has investigated
Andrew Proctor, FSA

The investment is linked to an index, such as the FTSE 100, and if this underlying index falls below a certain level, investors could end up losing most or all of their capital.

The FSA estimates that about 250,000 people have invested a total of 5bn in precipice bonds.

The ban imposed on David M Aaron Ltd relates to the sale of precipice bonds between January 1998 and June 2003.

Between these dates, the firm sold 53,000 financial products, of which 7,900 were precipice bonds.

The FSA investigation found that the firm:

  • Failed to issue advertisements and financial promotions that were clear, fair and not misleading.
  • Failed to carry out satisfactory risk assessments or make suitable recommendations.
  • The risks inherent in precipice bonds were "actively downplayed."
  • Failed to maintain adequate records, particularly of risk assessment meetings and sales records.
  • Failed to ensure its staff observed FSA compliance regulations.

"This is one of the most serious cases of mis-selling that the FSA has investigated, and the first time the FSA has banned a firm for mis-selling," said Andrew Proctor, FSA director of enforcement.

"The problems within David M Aaron Ltd were systemic and went to the very heart of the way the firm operated."

The firm took the decision in January to put itself into administration after a number of the firm's clients won cases at the Financial Ombudsman Service.

If the firm does not have enough cash to meet the mis-sold investors' claim, then the investors can turn to the Financial Services Compensation Scheme.




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