Imagine that you, like us, are in the business of making money for your clients and this drops into your e-mail box;-
“I wish to work with you regarding our Asset backed Investment product which offers a Fixed 16% returns and an Agent commission of 18% This modal acquired a well-publicized institutional capital raise from Roman Abramovich which makes it simple to research and complete DD”
So, this is a corporate bond offering a fixed 16% annual return and offering us, as an introducing agent, a commission of 18% or with full disclosure a payment of £9,000 for an £50,000 investment. Are alarm bells ringing yet?
We were also sent a link to a website and a brochure, which explained that the securities issuer was a Delaware incorporated company, with its trading office located in Dallas, Texas. Their specialism is Enhanced Oil Recovery, (EOR), encompassing the conventional techniques of waterflooding, steam or gas injection, thermal recovery and experimental techniques closer to “fracking”. As part of the application procedure, the website/brochure asked potential clients to:-
“Please confirm that you are one of the following
A sophisticated investor
A high net worth individual
A professional investor
A non UK resident”
The fine print at the bottom of the website says:-
“Disclaimer: Please note that XXXX XXXXXX XXXXXXX is not authorised or regulated by the Financial Conduct Authority and as such is not permitted to offer financial or investment advice to UK resident investors, whether or not the intended investments are regulated or unregulated. We strongly encourage you to consult and FCA-authorised Independent Financial Adviser before committing to any form of investment. This is not an offer to participate in a collective investment scheme as defined in section 235 of the Financial Services and Markets Act (2000) and therefore investors will not have access to the Financial Services Compensation Scheme or the Financial Ombudsman Service.”
So, this is a non-UK investment outside of the protections provided by the Financial Services Compensation Scheme or the Financial Ombudsman Service, which begs the question, “why is a third party asking a UK IFA to act as an introducer?”.
The answer is, I suspect, to give it some legitimacy, make obscene amounts of money for themselves and, potentially, leave a scapegoat when it all goes wrong. I am not going to comment on the legitimacy of the investment itself, as I do not know and I do not need to find out, but I do want to point out the pitfalls for members of the general public and any IFAs who take this further.
Cautionary considerations for the General Public
You are being asked to make a speculative investment in a foreign country, where you do not understand the rules and have no influence on the outcome once your money has left your bank account.
It makes a promise of a ridiculously high fixed return in an industry you do not understand. At best your capital is at serious risk, at worst, it will be stolen as soon as it leaves the UK.
If you invest without using a UK IFA to give you advise, you have no recourse to the authorities if it all goes wrong.
If you do use a UK IFA, they are being paid with your money; 18% of your investment to encourage you to do it (£1,800 per £10,000 invested). This does not sound like independent advice to me!
If your IFA gets you into this and then it goes wrong, you may get some or all of your money back eventually, but it will take years and the stress will be considerable.
Cautionary Considerations for any IFAs considering this
You are considered to be an “expert” by the regulation system and the Courts; if a client follows your opinion and it goes wrong, it will be your fault.
The Financial Conduct Authority will be very interested in any transactions that produce an 18% commission! As you should be aware, anything above 5% should be a red flag!
Delaware has the least onerous corporate standards in the USA; this is attractive to both the ‘legitimate’ and the outright crook. http://securitiesandinvestmentblog.blogspot.co.uk/2010/06/got-fraud-delawares-corporate-paradise.html, http://www.cbsnews.com/news/is-delaware-home-to-a-grand-corruption/, https://www.the-american-interest.com/2011/01/01/shells-shams-and-corporate-scams/.
What do you know about the Texas oil industry and experimental fracking techniques? I would be astonished if you have the competence to do sufficient due-diligence at this distance.
Any transactions of this nature will be outside scope of your Professional indemnity insurance.
Past Financial Ombudsman decisions suggest that self-selection as high net worth, professional or sophisticated is not enough to prevent your liability.
There are thousands of potential investments in the regulated arena, so there should be no need to use exotic investments for anyone in the retail space.
One of the significant elements that make up the cost of providing advice for us is paying for other IFAs mistakes via the Financial Conduct Authority levies. We would like an absolute ban on any IFA advising/introducing non-retail products, with any losses falling on the adviser alone. It should go without saying, but we will not recommend or introduce our clients to non-regulated products.
If you would like to know more about how we can help you plan and realise your financial goals then contact us at firstname.lastname@example.org or call us on 01223 792 196.
The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or