As a recent article published in The Telegraph demonstrates, risk can be a highly subjective component of any investment.
The basis of the majority of claims made against independent financial advisors (IFAs) seems to be that they mis-sold to clients because they failed to adhere to the client’s risk profile. But what do we mean by risk and is the term applied generically across the financial services industry?
When I studied complex systems for my degree there was a pretty straightforward starting point; understand the impact of a failure and the probability of it occurring and you can start to understand the risks.
Impact
Premium Bonds are regarded as one of the lowest risk investments because your capital remains intact even if you never win a prize. At the other end of the spectrum, entire investments can be lost when a Hedge Fund goes bust. The impact of failing to win a prize is clearly far less worrying than losing everything put into an investment.
So when the Financial Services Regulator encouraged consumers to take action against IFAs for mis-selling the EEA Life Settlements shares and branded them as high risk, where did EEA sit on the scale? Well given that the fund was based on life insurance policies that the US Government obliges insurers to make available for a secondary market, and the policies were underwritten by some of the world’s largest insurance corporations, the capital amounts invested should have been secure. In fact the only erosion in the value of capital was the amount of premiums paid and the management fees taken once each policy was purchased. Both of these factors were predictable but in this respect the investment could not be described as quite as low risk as, for example, Premium Bonds. But then very few investments are.
The risk with EEA Life Settlements shares was overwhelmingly about the magnitude of gains once premiums and fees were deducted and not about the loss of the underlying policy values. Not Premium Bonds, but certainly on the low risk side of scale as opposed to Hedge Funds or more speculative investments.
Probability
Even if the consequences of a fund failing are low, we rightly also consider the probability of that occurring. None of us would place our savings in a fund that was highly likely to fail. Although for many there may be an increasing desire to find safety by placing our savings in low or zero growth funds in order to avoid the uncertainty of financial markets.
To understand the probability of a failure, we were taught to study those factors which influence an entity, both in its immediate and extended environment. We would then conduct a detailed risk analysis. In the case of EEA Life Settlements, the probability of the fund crashing was extremely low because almost all the factors in its environment were detached (it was sold as uncorrelated because the performance of stock, currency or commodity markets had no impact on the fund). Life Insurance corporations might have failed to meet their obligations but the risk of this occurring would be no greater than large banks or even governments defaulting – it happens, but it’s thankfully rare and if we judged all investments exposed to this risk as high, every investment under the sun would be in that category.
The only real risk in EEA Life Settlements related to the magnitude of any gains with a very small risk of capital depletion if every policy holder outlived the life expectancy analysis (carried out by qualified physicians) by a considerable margin. Even if the fund had been badly managed, the underlying policies represented a rock solid asset.
In November 2011, it was accurate to describe EEA Life Settlements as low risk.
But then in November 2011 nobody could have predicted what would happen next.
The analogy that springs to mind is of a pedestrian crossing the road. There’s a risk which is largely determined by the traffic on the road and the common sense of the pedestrian, but we rely upon traffic controllers to mitigate that risk by implementing safeguards. What you don’t expect is a traffic control helicopter to target the pedestrian and deliberately land on top of him or her.
You could argue about whether the EEA Life Settlement fund was in a quiet country lane or the high street but prior to November 2011, when the traffic helicopter of the FSA landed on the fund, it was safe – it was certainly low risk.
It’s unfortunate for those who would like to take action against their IFA for mis-selling (as a consequence of risk) but the only thing that changed the risk status of the EEA Life Settlements Fund was the action of the FSA – the traffic police. The action of the regulator exclusively and retrospectively transformed the fund from low to high risk.
Another analogy; worrying lending decisions are discovered at 3 or 4 small banks. The regulator declares the banking sector to be on the verge of a solvency crisis; a run on all banks follows forcing the doors to close and access to all cash denied. Would it be reasonable to brand Barclays, HSBC or NatWest as high risk before this intervention? In the Life Settlements industry, EEA was the largest fund operating in the UK and one of, if not the, largest in the world.
At least we know that if the banks fail, tax payers will bail them, or if the FCA makes reckless comments about the insurance sector, millions of pounds will be spent on independent reports and officials will be too embarrassed to accept their bonuses.
What is the risk, I wonder, of our new administration doing the right thing for ordinary savers?
Action Group For Life Settlement Fund Investors 
David
I will continue to repeat the mantra that the FSA was the reason we can no longer gain access to our money until we get our money back. That is because it was the FSA NOT EEA who were responsible for the loss of access to all of our funds.
I haven’t said they were the only ones at fault (I’m not totally convinced either way) but they were the cause of the suspension. You have presented EEA with your analysis and they refute it. You have presented your analysis to the GFSC and they have done nothing with it. I urge you to send it to the law enforcement agencies but if they too do nothing with it, you might start to question whether your analysis is correct. Masses of data might help to ‘form the basis of evidence’ but that’s not the same thing as actual evidence.
This isn’t about endless meetings or analysis, it’s really very simple indeed, the FSA made factually incorrect and inflammatory statements which directly caused a run on the fund. Unprepared (as most businesses would be) for the unprecedented demand for redemptions, the fund was forced into suspension. Everything else is secondary – it doesn’t even matter if EEA was a dog’s dinner because the action taken by the FSA would still have been disproportionate and illegal, and it was that (not any wrong doing) which forced the fund to close.
All we need is for the two action groups to fall out
David, the other David and I have always seen this from different angles. I’m content to continue co-operating but when press releases are sent to the major newspapers that potentially harm our court case in European, I am going to respond. Whilst we may co-operate, our differences will sometimes result in conflict.
PETE
i WAS REPLYING TO MY NAMESAKE’S BLOG OF 3.48 ON 4TH jUNE
Correction DPW – all EEA and the FCA needs is for the two Action Groups to fall out.
Peter / Terry / Ian : I’m not going to continue this “dialogue” in public – or even by email. Please let me know if / when you’re ready for a meeting somewhere.
David: There’s nothing that I need to discuss that requires secrecy and I’ve always taken the view that if what I say doesn’t stand the scrutiny of others, I must be wrong. There’s seldom any reason for closed door meetings unless there’s something to hide.
As for email, not only would I prefer to avoid burning up expenses on uneccessary meetings but I prefer to have a record of what is said.
The good thing about this site is that all interested parties can read what is being said and the replies, and frankly I think they’re entitled to that. Even though I disagree strongly with some comments, you won’t find any censorship unless they’re completely off subject or promoting viagra!
Agreed
Thanks David!
It’s worth adding that the EEA Investors Group agrees that the FSA announcement directly caused the EEA Fund
suspension, this sometimes gets lost in amongst the verbosity. 🙂
You can see a more comprehensive summary of the risk issue as it applies to EEA and IFAs at http://eeainvestors.com/wp-content/uploads/WP8B-Risk.pdf
and lots of other info at http://www.EEAInvestors.com.
The EEA Fund was always high risk (regardless of what it said on the tin and the brochures) because of almost 20 complex risk factors identified over time by EEA themselves, in a prospectus that most investors never saw, or were never updated on.
Half a dozen of these declared risks have now turned out for the worse, regardless of the reckless FSA announcement. The only risks that EEA didn’t declare were the risks that they would mis-manage and mis-represent the Fund or that a clumsy regulator would suddenly jump in at some time with size twelve boots on and spoil the party, instead of working sooner and more competently to warn investors and advisors of what they had known since 2009 and which EEA had incorporated into their risk warnings during 2010 and 2011.
Yes – the FSA announcement DID trigger the EEA suspension, and cause investors to lose access to our capital and potential growth. But it was EEA who actually ran the Fund which can no longer repay all the investors’ remaining capital, or any “growth”.
It is not valid to argue that everything would have been OK if new investor cash and further policy purchases had saved the day – EEA’s own numbers simply don’t add up. It would only have pushed the problem along to another day when even more chickens would inevitably come home to roost.
We all need to keep open minds and pursue BOTH actions – against the FCA / Treasury and against EEA & their associates. Both avenues are complementary – as Peter and I agreed more than a year ago when he started this second Action Group.
We will never get all our money back – we have to work in parallel to get back however much we can from all possible sources.
IFAs and their insurers (who are paying 150% compensation bills or future FSCS levies) and are going out of business, or damaging their reputations / client relationships as a result of this saga should also be much more interested in getting to the bottom of the issues surrounding the Fund, and stop believing everything that they were (and are still being) told by EEA and its agents, with their conflicted interests and one eye on their backsides and expensive lawyers (at our expense incidentally).
This is an interesting summary David but it does falls at the first hurdle because, whilst ackowledging the importance of consequences (impact), it fails to link consequences to the suggested causes.
All EEA investors need to consider that there are two main risks to any investment 1) that they fail to achieve their desired return on investment and 2) that they lose the capital they put in.
In this case, we do not know what the outcome will be but the likely range is between not achieving the desired return but not losing the entire capital stake either. You may speculate about branding the fund as a high risk of not providing 8 – 10% per annum ROI, but before the FSA intervention it was not at a high risk of losing our captial, it was a very low risk until the FSA waded in.
I also don’t think it helps to sling mud at the directors or IFAs. If there is evidence of wrong doing it should be handed to the appropriate law enforcement agencies, if there is not, it should not be stated as evidence. This only damages the credibility of the case and does nothing to support those of us who are trying to take action against the one party we know was guilty – the FSA. The avenues we pursue can continue to be complimentary whilst your aim is maximise the return for investors by scrutinizing the ongoing management of EEA and in particular the fees/management charges taken out of the fund. But it is not in the best interests of either of our groups to jump on the ‘bash the IFAs’ band wagon or speculate about impropriety, neither will it help to call for an expensive administration to be imposed which will further deplete whatever funds remain.
Peter, we have discussed all this privately by phone and email and it really doesn’t help to wash our linen in public. I have offered to meet with you, Terry and Ian (just this morning in fact with Ian) and its never possible. We have never criticised or disrespected your campaign (in fact we’ve endorsed it as a complementary and valiant effort) and don’t appreciate you making speculative and conjectural criticisms of our own efforts.
We HAVE published masses of data which can form the basis of “evidence” and are still compiling more. We have openly passed this to the Company, who repeatedly refuse to acknowledge it, or deny that anything is wrong. We have also passed it to the Regulators in Guernsey and the UK at appropriate times, but they work in secret behind the scenes and we have to await the outcome of any actions they choose to take.
We are now investigating the feasibility of compiling the evidence to pass on to law enforcement and investigatory authorities or to initiate properly thought out litigation.
It’s you and your colleagues who are refusing to see that while the FSA did cause extensive damage and disruption it’s EEA that has lost our money for various reasons which we have carefully and expertly documented in detail. I have never gone in for IFA bashing and carefully explained our position to IFAs back in January 2014 (before your Group was formed). We have also helped many IFAs to defend their positions when necessary or negotiate amicable settlements with their clients, without recourse to the Ombudsman or the Courts.
When the FCA issued their notice last September about impending deadlines for FOS claims then we felt duty bound to bring it to the attention of all members, and assist them where appropriate, which is why we drafted the relevant Working Papers, template letters and other aids. We also stated that (in our view) IFAs had a duty to bring the FCA notices to their client’s attention, but many didn’t because it raised a conflict of interest issue – or they were forbidden from doing so by their PI insurers. Our obligation is clear. We are here to provide information to help investors recover as much of their money as possible as quickly as possible, from whatever combination of legitimate sources as possible. Whether that be your campaign, IFAs (via the FOS / FSCS if necessary), EEA, the auditors or anyone else. – and that’s what we’re working hard to do.
No IFA will be awarded a claim against him / her by the FOS/FSCS if they had done their job as required. If they don’t agree with the criteria used by the FOS / FSCS then they can appeal and campaign to change the system. They can also campaign to improve the PI Insurance system which currently lets down the IFAs and investors when they need it the most. Investors have no such courses of action. Those outside the UK are even worse off.
Please stop repeating your mantra that the FSA was the only one at fault. They weren’t and we have proven it. How we can convert that fact and data into more cash for the investors is the mountain that we are currently climbing, and we would appreciate your support and encouragement – just as we support and endorse your own tireless efforts.