11th Jul

Victory for investors in failed ‘secured’ bond; the need for caution when investing in retail bonds or mini-bonds

Investors that had been staring down the barrel of a £7.5m loss look set to be compensated after the Financial Ombudsman Service (FOS) upheld two complaints against Independent Portfolio Managers (IPM), the company that promoted the ill-fated Secured Energy Bonds, offered by Australian CBD Energy  

The bonds were launched in October 2013 with a minimum investment of £2,000 and a promised rate of return of 6.5% p.a.; they were touted as a 'secured mini-bond', but came with no FSCS protection  

Secured Energy Bonds claimed that the money raised would be used to install 22 rooftop solar installations across schools in Britain, but problems arose when a large amount was siphoned off by the Australian parent company CBD Energy Ltd; SEB went into administration early in 2015 and its CBD Energy had been placed into administration in 2014.

Blue Energy plc took over some of CBD Energy's assets but not their liabilities, thereby cutting off all SEB claims; investors were first alerted to the problem in January 2015 when a coupon payment was missed. 

Following a three year wrangle, the ombudsman found against IPM and has given them 28 days to compensate investors; IPM also approved the Providence Financial bonds that went bad in 2016 to the tune of £8.1m (Investors sweat as mini-bond issuer goes bust). 

IPM was ordered to 'cease all regulated activity' by the FCA last November.  

Some investors formed an action group, complaining about the role of IPM, which was FCA regulated, as the 'approver' of the invitation document, security trustee and corporate director of the bond. 

The invitation document said that because it had IPM on the board, the investment enjoy a greater level of security than had previously been associated with mini-bonds, labelling this a 'step forward':

'This process ensures that the material that an investor bases his decisions on are fair, non-misleading and are a good basis for delivering the expected returns and security. 

'Secured Energy Bonds has selected IPM, that has both the experience in the renewable market as well as expertise in conducting high quality research and managing money for investors. 

'This provides a more stringent test of fairness and deliverability. Even further, IPM will be a corporate director ensuring that the initial stringent test of fairness continues throughout the term of your investment.' 

According to the prospectus, this made the bond 'secure' and investors were told: 'As this is an unregulated market, the company has also appointed an FCA regulated company to sit on the board of SEB, and act in the investors' interest as a ‘security trustee’. 

This meant that the bond was allowed to be marketed to retail investors. 

FOS have described the two complaints that it upheld as 'sample cases' and it is expected that those in similar circumstances, which could number up to 1,000 investors, are also likely to have their complaints upheld.  

If IPM fails to pay, further penalties will be added and if IPM is deemed insolvent investors are hopeful that claims will be passed to the Financial Services Compensation Scheme; an encouraging display of people power, but a reminder that it is very important that investors understand the risk they are taking before they sign on the dotted. (Caveat Emptor: Mr Bond urges caution when investing in 'retail bonds')

FOS ruled that IPM's involvement was not only approving the promotion documents but that it 'had an ongoing role in the investment scheme' and was 'central to the security and quality assurance arrangements' of SEB. 

It added that the security that was put in place for the mini-bond was flawed, 'leaving the security secured, in effect, on nothing. This was a fundamental flaw and one which IPM should reasonably have spotted.' 

Fiona Pitkeathly, of SEB and Providence Bonds Action groups, said: 'The Secured Energy Bonds and Providence Bonds cases have exposed a fundamental shortfall in the way financial promotions are approved and publicised by FCA authorised companies.

'With no specific sanctions to deter FCA companies from approving financial promotions containing ‘unclear’, ‘misleading’ or ‘not fair’ information, FCA companies can publish whatever they like it seems.  

'This leaves the public completely unprotected and there is little doubt that without urgent regulatory change further similar scandals are inevitable. 'FOS upholding our complaints is also good news for investors in Providence Bonds plc and Providence Bonds II plc which were also approved by IPM and went into liquidation in September 2016.' 

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