Successful campaign, but FSCS still dealt a crushing blow to vulnerable victims

UK savers invested more that £100m in stock market index-linked savings plans backed by Lehman Brothers Bank in 2008. The plans were targeted largely at inexperienced savers, including many with newly acquired lump sums, typically from pension schemes, redundancy payments or inheritance. The plans were marketed with reassuring names leading people to believe their capital would be protected, but the products turned out to be 100% dependent upon the fortunes of Lehman Brothers, which failed in September 2008. These plans were examples of a type of savings plan known in the industry as ‘structured products’ and this event was one in a string of structured product mis-selling scandals in recent years.

Lehman Brothers Plans protestors at FSA Canary WharfIn the wake of the Lehman collapse, affected savers lobbied their MPs and campaigned for an investigation. The FSA (Financial Services Authority) duly found the literature for all Lehman-backed plans sold by NDFA, DRL and ARC failed to reach the required industry standards and the products had therefore been mis-sold. The FSA found investors were insufficiently warned of the risk factors and should be compensated for their losses resulting from Lehman’s collapse.

This ruling was a resounding success for the campaign and the efforts of affected investors. With the prospect of massive compensation claims looming and limited resources, the three firms went into administration. So, affected investors were left looking to the Financial Services Compensation Scheme (FSCS) to make good the losses on behalf of these three firms.

Unfortunately, the FSCS resorted to the opinion of lawyers, who contended that the FSA investigation had failed to recognise that some plans had, in their opinion, not breached FSA rules, and the FSCS could deny compensation for some plan holders. However, the FSCS were unable to deny compensation for all plans and paid around £25 million in compensation.

Some uncompensated plan holders did not give up. They challenged the lawyers’ opinion and received compensation for plans previously rejected for compensation. The FSCS did not publicise this reversal and many investors with plans newly eligible for compensation failed to apply.

Investors who did not receive compensation have been left to rely on the proceeds of the various Lehman administrations. As of March 2016, investors have received slightly over 50% of their original investment back.  Further unknown receipts are expected over an undefined number of years.

The UK financial authorities have now gone some way towards addressing the shortfalls in marketing this type of product, but the underlying vulnerabilities of this product class still exist. Providers are still allowed to call the products ‘capital protected’ even when savers could still lose their money.  Many financial advisers now avoid these products, but they are still widely available to ordinary savers.

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