Every pension scam starts with abuse of trust. A scam only works if the victim trusts the scammer. Sadly, this happens in all walks of life. We’ve all done it: trusted someone who let us down. A friend, colleague, employee, neighbour or even family member.
Life would come to a complete standstill if we didn’t take a chance and trust people. That is in most people’s nature – we all want to believe that people are good, honest, sincere and trustworthy. And that is what pension scammers trade on – and why so many victims get scammed out of their life savings.
How do snakes in the grass con their victims?
There is a fine line between an outright scam and “mere” mis-selling. Whether a criminal offence has taken place is up to law enforcement in the relevant jurisdiction to decide. Fortunately, in Malta there is an Arbiter for financial services, and he can rule on whether mis-selling has taken place – and order that the victim should be paid redress. However, the Arbiter cannot rule on criminal complaints – that is a matter for the police and is a separate issue.
Arbiter’s decision on a victim’s complaint against Hollingsworth International Financial Services Ltd.
An elderly lady consulted Hollingsworth International Financial Services in Malta about her life savings in 2011. She told Hollingsworth’s employee Paul Tilbrook she wanted her funds invested safely and cautiously. Her savings amounted to over £400,000 and she wanted to move them to a safe pair of hands to make sure her capital was protected. The adviser promised her that her money would not only be protected, but that it would be “actively managed” to ensure diversity and growth.
What happened in reality is that Paul Tilbrook of Hollingsworth International invested this cautious victim’s funds in high-risk, professional-investor-only structured notes. Forty of them in all. He would have earned between 6% and 10% commission on each of these notes – and it looks like he was “churning” the notes to maximise the amount of commission he could earn from the notes. This is a practice whereby a rogue IFA keeps buying and selling notes – from providers such as Commerbank, Nomura and Royal Bank of Canada – so that every time he buys a new one he earns another chunk of commission.
Let’s look at the Malta Arbiter’s decision about an adviser at Hollingsworth International who sold an elderly client a sack full of structured notes. The Arbiter upheld the 84-year-old investor’s complaint and ordered the firm to pay redress for her losses.
This was a typical case of mis-selling by an adviser who has put his own profits before his client’s interests. The client told the adviser she wanted capital protection and low risk. The Arbiter noted that:
“ MFSA regulations state: the License Holder shall not be regarded as acting honestly, fairly and professionally in accordance with the best interests of a client if it is paid any non-disclosed fee or commission which is a conflict of interest because it could influence the conduct of the adviser”
This facet of the case (as reported in an earlier decision against Hollingsworth International) was not highlighted – presumably because the investor had not been aware of the undisclosed commissions which would have been paid to the adviser for the structured notes. On a fund of £400,000, with at least 40 different structured notes over the period, Hollingsworth International would have earned up to 9% commission on each one.
The adviser’s defence is interesting because they insist it gave no investment advice but merely “assisted” the client by filling out a fact find.
It is also worth noting that the firm boasts “partnerships” with Nomura, Royal Bank of Canada and Commerzbank on the home page of the Hollingsworth International website (alongside Old Mutual International and Friends Provident International). This, despite the fact that the Arbiter has found the firm guilty of mis-selling structured notes provided by these firms in contravention of the Malta regulations.
It is also notable that the firm considers it did nothing wrong and blames the structured note losses on “market forces” without acknowledging that these high-risk, professional-investor-only instruments were entirely unsuitable for such an investor (cautious and elderly). Indeed, the defence that the term “professional investor only” merely refers to the documentation, rather than the actual investment, raises the question as to whether this firm understands investment principles at all.
GJ vs Hollingsworth International Financial Services Ltd. 15 January 2019
Summary of Complaint
Complainant GF, 83 years of age, British Malta resident since 1992. In April 2011, Paul Tilbrook of Hollingsworth International (Malta) compiled a Fact Find. She held investments in equities, bonds and funds in offshore bank accounts. She worried her funds (Isle of Man and Channel Islands) would not be safe and asked PT for something more secure.
GF informed PT her investment attitude was cautious or medium and was categorised as a Retail Client.
PT prepared a report outlining recommendations and charges, describing how investments would be allocated between different products. The report stated: “it makes logical sense to move funds to a much more protected structure whilst still retaining your investments’ offshore status”.
PT wrote “I have deliberately included a range of capital protected structures and funds to provide more diversity. As new opportunities arise, we will suggest these to you and recommend that they become part of your overall investment strategy. Our role is to monitor each fund in the portfolio and recommend changes accordingly. This ‘active management’ principle means that changes can be made quickly and cost effectively.”
£408,001 and $58,831 were transferred to a new account with Ned Bank Jersey office. Between 2011 and 2015, GF bought circa 40 structured notes.
PT stated: “these structured notes are complex instruments deemed to be suitable for your investment needs.” GF claimed the investments recommended were intended for Professional Clients.
The market value of GF’s portfolio fluctuated over time. In September 2014, it was around £400,000, but then it fell to £241,329 in 2015.
The capital loss by December 2015 was £203,387 – 48% of her capital. This widened by June 2016 to 50% of her investment. The loss was based on structured notes which had not yet matured. (However, some of the losses did later recover somewhat).
GF stated she was not an experienced investor and that her previous investments were not high risk. She could not understand the Hollingsworth portfolio. She stated: “When I invested, I did not know it was high risk until my portfolio started going down.” When she told PT he replied: “Don’t worry, you’ll get your money back.”
Her portfolio was examined by experts in England and she was told, ‘You might as well have played them at the casino or bet on the horses.’
GF Sought
- Declaration that respondent has failed its fiduciary obligations towards GF
- Declaration that respondent, through gross negligence and recklessness, committed investment mis-selling
- Order for respondent to compensate and reinstate her to former financial position with interest
Company Replied
- Losses suffered were exclusively as a result of factors such as market risk, credit risk or fraud risk, and not the fault of the company.
- PT never gave investment advice. He simply assisted GF with the Fact Find and Key Information Documents.
- The statement: “For Professional Investors Only – not Suitable for Retail” related to the KID (information document) and not the underlying product.
- It is untrue that complex (structured) products cannot be suitable for Retail Clients. The products offered to the complainant were lower risk than the actual equities and fit within her risk tolerance and investment objectives
- There were no regulatory obligations to provide copies of the Fact Find or other documents to the complainant.
- Suitability was satisfied as investment advice is based on highly-subjective professional judgement
- Claim is unfounded as the company has always acted in a professional manner as is required by the financial services regulatory framework and denies investment mis-selling.
- Complainant’s losses are not due to the complexity or unsuitability of the structured notes recommended but as a result of Market risk.
- Compensation including interest should be rejected as the loss was not due to the Company’s negligence or misconduct but solely due to unforeseeable market movements
- GF’s portfolio was not high risk; it was a balanced but not cautious portfolio.
Arbiter’s Conclusion – upholding the complaint:
The Arbiter decided that the complaint is fair, equitable and reasonable in the circumstances and substantial merits of the case.
Hollingsworth were unprofessional because the client lost her capital. Capital protection was of foremost importance. None of the structured notes recommended were capital protected (in the true meaning of the term).
The provider failed to follow good industry practices and did not fulfil the reasonable and legitimate expectations of the consumer. The provider wrongly advised the complainant when it mis-sold a pool of 35 structured investment products which were unsuitable to her. The provider’s behaviour was in breach of his contractual obligations towards the complainant.
The Arbiter has decided that inter alia there was mis-selling of financial products, so the complainant should as much as possible be compensated for her losses including “dealing charges” which were paid by her. It was clearly evident that the structured products were aimed towards professional or sophisticated investors as clearly labelled on the marketing documentation.
The Asset Allocation was over-exposed to structured products with limited capital protection aimed at professional/sophisticated investors. There was hardly any “active management”– a promise made by the provider – but rather an investment strategy that remained passive throughout. Indeed, the provider itself confirmed that these products were meant to be held till maturity.
Hollingsworth International is ordered to pay the complainant the sum of £81,452 (the current loss on matured structured notes) with interest from the date of the decision till the date of payment. The four investments which have not yet matured are to be kept by the complainant without prejudice to any legal remedies she might have at the date of maturity.
