Is Harlequin going to be the next “Keydata” scandal?

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£400 million is tied up in Harlequin, the failed Caribbean property investment scheme now under investigation by the Serious Fraud Office. There is a real question mark around how much investors will get back and whether they will sue their advisers for recommending the investment in the first place. This article explores the potential repercussions for IFAs and their insurers.

Harlequin’s troubles

Harlequin was never regulated by the FCA. Investors switched from pension schemes into self-invested personal pensions (SIPPS), then typically invested a deposit worth 30 per cent of the purchase price for an individual room (sold freehold) in a luxury Caribbean hotel. Why? Investors were promised 10 per cent of the purchase price back for the first two years after completion of the hotel and then 50 per cent of net rental income after that.

It did not go to plan. After some bad press in 2010, it was revealed that holiday resorts due for completion in 2008 had not even been started. 2013 was an even worse year for Harlequin:

  • January – the Financial Services Authority (FSA) issued an alert stating that “financial advisers have to ensure that they give careful consideration to the features” of an overseas investment, including “thorough due diligence on the various developments being sold through Harlequin.”
  • March – the Serious Fraud Office and police began investigating complaints by investors and the FSA confirmed that only 300 of 6,000 off-plan properties sold had been built.
  • April - with the above contributing to a lack of new investment and shortage of capital, Harlequin filed for administration.

Ombudsman claims

£400 million is at stake. Keydata was around £200 million. We do not know what is left.

Unsurprisingly, regulatory bodies have been quick to exercise zero tolerance. Since January 2014, tighter controls now govern the retail distribution of unregulated collective investment schemes (UCIS), as stated in the FCA Policy Statement (PS13/3 Restrictions on the retail distribution of unregulated collective investment schemes and close substitutes). Attempts to petition the courts to wind up the offshore Harlequin companies failed and with the Financial Services Compensation Scheme previously attributing no value to Harlequin, advisers face a raft of expensive Financial Ombudsman Service (FOS) decisions and claims.

Investors are now successfully seeking redress from advisers in respect of switches out of private pensions and into SIPPS invested in Harlequin before any Financial Conduct Authority issued guidance. Indeed, we are witnessing FOS findings in favour of investors even where:

  1. The investor approached the adviser with the pre-existing intention of investing in Harlequin.
  2. The adviser expressly confirmed in writing that it was not advising on the suitability of Harlequin, was acting only in respect of the transfer into a SIPP and was paid only in respect of the advice on that SIPP.
  3. The adviser can prove it carried out due diligence on Harlequin, to the extent of making site inspections and enquiries of local politicians and commercial partners.

What next?

FOS claims have already been made. Investors seeking damages in excess of FOS limits will pursue their claims through the courts. Key principles to keep in mind are:

  1. Many claims are approaching their six year birthdays and will soon be time barred.
  2. The quality of the defence will depend on the retainer letter. When assessing the suitability of advice on a SIPP, the FOS does not have time for oral hearings so snap decisions are made on the facts available.
  3. FOS awards rarely pay attention to strong causation arguments. FOS awards too often ignore the fact that the investor came to the adviser, already intent on investing in Harlequin and that he/she would have done so, irrespective of the advice/warnings given.
  4. The FOS’s assessment of loss is also usually more “claimant-friendly” than that of a court. A court may reduce damages on the basis that the investor’s best case is for the loss of chance to remain in their prior investment (rather than a guarantee they would have done so). Damages for distress and inconvenience are generally irrecoverable in court.

Is Harlequin a UCIS?

Many insurers do not provide cover for UCIS investments, specifically excluding them.

Whether an investment is or is not a UCIS will depend on whether the details of the scheme fall foul of the statutory definition of a UCIS as set out in section 235 of the Financial Services and Markets Act 2000, and will depend on whether the investors have pooled their investments and whether the scheme is “managed as a whole”.

Many FOS awards have condemned Harlequin as a UCIS. Many of the Harlequin investments were indeed managed as a whole.

Practice points for IFAs

For the IFAs and their insurers left defending the claims:

  1. A well-kept file is an IFA’s best friend. Anything recording the suitability of Harlequin investments will be very helpful, if it can withstand the scrutiny of hindsight.
  2. If a claim materialises, notify it and seek advice straight away. There may be a possibility of knocking a claim out early, on grounds of it being brought out of time or, even if there are vulnerabilities, causation and loss defences may be of real value.
  3. Lessons can be learnt from Harlequin. Pay careful attention to what a SIPP will likely comprise and evidence this assessment. Be wary of the argument that your firm is acting on an “execution only” basis. It is likely to hold little sway.
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