Thousands of financial adviser clients were thrown into uncertainty this week after the Financial Services Authority (FSA) said it had fined Deloitte & Touche Wealth Management(DTWM)£750,000 for serious compliance failings.
The fine relates to mis-selling of the now notorious split-capital investment trusts. These were originally a tax-saving device, for their shares were split, some taking all the dividend income and the rest taking the capital growth. When they were launched, in the 1980s, income and capital gains were taxed at different rates.
But the concept became corrupted in two ways. The managers borrowed heavily, exposing shareholders to high risk if profits fell because the trusts would still face interest payments. Secondly, split-capital trusts invested in one another, compounding the risks.
Andrew Procter, the FSA's head of enforcement, said: "DTWM's failings were so serious that, had it not been for the decisive action taken to improve standards after new management assumed control, we would have considered preventing the firm from doing investment business."
The fine comes hard on the heels of the collapse of two other firms of advisers, RJ Temple and David Aaron Partnership. Both, like DTWM, had strongly recommended clients to invest in precipice bonds. Last year Lloyds TSB was fined £1.9m for similar offences.
But industry observers regard this as no more than the beginning, for split-capital trusts and precipice bonds were widely sold by advisers throughout the UK. While DTWM's parent, the accountancy group Deloitte & Touche, is big enough to absorb the fine, smaller firms may be forced to close and the individuals concerned may have cease their FSA registration.
That will have repercussions for clients. If an adviser closes, its customers have to seek redress from the Financial Services Compensation Scheme, which can pay no more than £48,000, the first £30,000 plus 90 per cent of the next £20,000.Reuse content