Page last updated at 12:08 GMT, Tuesday, 27 October 2009

Regulator acts on Lehman products

A man looks out the window at the Lehman Brothers headquarters in New York
More compensation could be on the way to people who lost their money

The financial services industry has been told to compensate any people who have been mis-sold investments backed by the collapsed Lehman Brothers bank.

The order from the Financial Services Authority (FSA) comes after an investigation into the sale of the so-called structured products.

About 5,600 people in the UK are thought to have lost about £107m

The value of the complex policies depended on a now worthless guarantee from Lehman Brothers.

The policies, typically sold via independent financial advisors, claimed to be "guaranteed" or "100% secure".

But the FSA said these were often mis-sold.

"The FSA found significant advice failings on Lehman-backed products in most of the financial advice firms sampled, as well as serious deficiencies in the marketing literature provided by a number of the plan managers selling these products," the regulator said in a statement.

Enforcement action

Lehman Brothers collapsed in September 2008, one of the pivotal events in the international banking crisis.

They are complicated investment policies.
They were typically sold to members of the public by financial advisors
They last for a set period of time eg five years.
They usually have two elements.
The first is a bond from a bank, which is supposed to protect the original amount invested.
This may also pay interest, and may repay all or some of the original capital when the policy matures.
The second part is a derivative - a bet on a financial market - which is supposed to generate a return for the investor when the policy matures.
Investors usually receive only part of any increase in the value of the derivative which occurs during the term of the investment.

The regulator has been investigating the problem of the structured products for several months and three of the four firms that devised the policies have already declared themselves insolvent in the past month.

This has paved the way for 4,000 or so customers who bought the Lehman-backed policies to make claims for compensation under the Financial Services Compensation Scheme.

The FSA said it was writing to all the remaining people who bought the investments, encouraging them to complain if they think they were misled or did not receive proper advice.

The firms that sold the policies in question have been told how the regulator expects them to deal with such complaints.

Some of them have already been scrutinised and have been told to be proactive and review the way they sold the investments, paying compensation "where appropriate".

Three of these financial advice firms are now being investigated under the FSA's enforcement powers.

Poor advice

About 570 financial advice firms, ranging from one-man independent advisors to big High Street banks, have been found to have sold the policies.

In the FSA's view, their misdemeanours went further than simply relying on the misleading marketing literature provided by the plan managers.

It found instances where advisors suggested that investors put all their money into the policies, or where they were not asked if they were happy with the level of risk involved.

About 95% of the people who bought the investments did so as a result of being given advice rather than buying the investments directly from the plan managers.

"This is a hugely complex area given the number of different firms involved, and there is no one-size-fits-all solution for these investors," said Dan Waters, an FSA director.

"However, given the failings we have come across in the marketing and selling of these products, we are setting out a package of robust measures to help those who have lost money."

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