Regulator ruling may ‘pave the way’ for more dodgy investment compensation claims

A failed tree plantation in Costa Rica provides hope for investors misled into making risky investments, and a warning for the firms behind them.

A ruling by the Financial Ombudsman Service (FOS) may offer hope to investors wanting to claim compensation after having been duped into investing in high-risk assets.

This week the FOS ruled in favour of five investors who lost a total of almost £100,000 after investing their pension funds into tree plantations in Costa Rica.

The investments were made through Self-Invested Personal Pensions (SIPPs) with a scheme called Ethical Forestry, which promised returns of up to 15%.

The firm is now in liquidation and is under investigation by the Serious Fraud Office.

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Failing investments in tree plantations

In each case, an unregulated introducer firm called Avacade cold-called the investors, and sweet talked them into investing their pension savings into Ethical Forestry.

This came after offering them a ‘free pension review’, three words that should set off serious alarm bells anytime you hear them from someone who has contacted you out of the blue.

In order to invest in Ethical Forestry’s scheme though, they would need to open a SIPP with the provider Guinness Mahon.

In total around 2,000 people were believed to have invested in the scheme, handing over around £86m, which ultimately failed after the plantation was hit by a hurricane.

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Failing to perform due diligence

The FOS found a host of issues with Guinness Mahon’s conduct in these cases. In total the provider accepted around 230 SIPP applications through Avacade between May 2014 and September 2015.

Guinness Mahon had asked regulated independent financial advisors to sign off the cases, having checked samples of the reports given to the clients which should have explained the potential risks.

But according to the FOS, these reports not only suggested that Avacade had been giving advice - something it was not regulated to do - but they were also unbalanced, with the clear aim of pushing the client into transferring the money.

In essence, both the IFAs and Guinness Mahon had failed to carry out anything like the appropriate level of checks that should happen before these sorts of transfers are made.

It’s worth noting that last year the Financial Conduct Authority began legal proceedings against Avacade, alleging that the firm was illegally carrying out regulated business.

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What happens now?

The FOS has ordered Guinness Mahon to pay compensation to the five claimants, in order to get them back to the same financial position they would have been in had they not transferred the money into the SIPP.

However, this decision was made at the adjudication stage. The firm can appeal the outcome and take it to the Ombudsman for a final, over-reaching verdict.

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Don’t be daft with your pension

There are a few important lessons to take from this situation.

Firstly, it’s a reminder of the importance of being cynical about anyone promising you eye-opening returns from a non-mainstream form of investment.

The chances of getting a 15% return in the current climate from anything is pretty remote, let alone a forestry investment in an exotic land.

It’s also another example of how SIPPs are being abused. SIPPs themselves aren’t the problem here.

It’s fantastic that individual investors have more control over precisely how their pension funds are being invested, and where once the SIPP was once the exclusive preserve of the wealthy, they are now much more affordable for regular investors.

Hell, even I have one.

No, the issue is with investors being talked into using SIPPs, operated by providers who aren’t doing their jobs properly, in order to put their money into shady investments that have little chance of ever delivering the returns the cold callers promise.

Clearly far more needs to be done to ensure that SIPP providers aren’t able to form these dodgy partnerships with ‘introducers’, with more stringent tests in place before investors are allowed to move their money into unconventional assets.

On a more hopeful point though, it does show that if you’re on the receiving end of one of these iffy investments, there is at least a chance of getting some, if not all, of the money back.

APJ Solicitors, who represent the five claimants, have argued that this decision may “pave the way for others” who have been misled into making risky investments through their SIPP.

You can check if a pension firm is genuine by checking the FCA's register, although keep in mind that genuine investments can still be high risk.