Investors in a failed mini-bond are celebrating after the ombudsman upheld two complaints about the role of a firm that promoted them with bold claims.
Secured Energy Bonds, offered by Australian company CBD Energy, launched in October 2013 with a minimum investment of £2,000 and a promised rate of 6.5 per cent. The spin said it was a ‘secured mini-bond’.
However, as This is Money revealed in January 2015, the bond, which claimed money would be used to install 22 rooftop solar installations across schools in Britain, went sour.
After a long battle, the ombudsman has found against the company that helped promote them. An SEB bondholder told us that the ombudsman has given IPM 28 days to compensate investors.
Not so sunny: The mini-bonds were meant to be used for solar panel projected – but ended up being siphoned off to its Australian parent company
Some investors clubbed together to form an action group, which This is Money supported by publishing the e-mail address and helping others get in touch when new complaints came in to us.
They had complained about the role of Independent Portfolio Managers in promoting the mini-bond.
The Financial Conduct Authority regulated company was tasked with being the ‘approver’ of the invitation document, security trustee and corporate director.
In the document for the bond, it said that because it had IPM on the board, the investment would enjoy a level of security not previously associated with the mini-bond market, and labelled this a ‘step forward’.
It added: ‘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.’
This made the bond ‘secure’, the prospectus said. 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”.’
IPM approved Providence mini-bonds that also failed in 2016.
IPM was finally ordered to ‘cease all regulated activity’ by the FCA last November.
If IPM had not been involved in either bond, they would not have been advertised to private investors in Britain.
After struggling with the Financial Ombudsman Service for nearly three years, SEB investors have now finally been told that two of their complaints have been upheld.
It is expected that those in similar circumstances are also likely to have their complaints upheld, as FOS have described these two complaints as ‘sample cases’.
Nearly 1,000 investors had poured money into the bonds.
One investor, Fiona Pitkeathly, told This is Money: ‘As I’ve accepted the Ombudsman’s decision, FOS has instructed IPM to repay me with compensation within 28 days.
‘If they fail to pay, then there are further penalties added. If IPM is deemed insolvent, we anticipate investors’ claims will be passed to the Financial Services Compensation Scheme in due course, although I believe there are a few hoops to go through to get there.
‘Regardless of whether IPM pay up or not in the next month or so, the really big story here is that FOS have awarded in investors favour – so many said we didn’t have a chance and we’ve proved that people power works.’
Mini-bonds: They are risky products with minimal protection for investors, as we explain below
The problems with the bond arose when a large amount of the funds was siphoned off by the Australian parent company CBD Energy Ltd for other purposes.
SEB went into administration early in 2015 and its parent 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.
The first that investors became aware of the problems was at the end of January 2015 when an interest payment was not made, as revealed by This is Money.
The FOS ruled that IPM’s involvement was not only approving the promotion documents but that IPM ‘had an ongoing role in the investment scheme’ and was ‘central to the security and quality assurance arrangements’ of SEB.
The FOS has restricted its ruling to issues around the bond at launch, which portrayed the product as safe and secure, and not the subsequent role of IPM, when SEB went bust.
HOW TO CONTACT THE ACTION GROUPS
Investors can contact the two action groups on:
The FOS ruled 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.’
Investors formed the SEB Investors’ Action Group, which has been raising the case with the FCA, the FOS, the Treasury, Treasury Select Committee and hundreds of MPs.
It is estimated that only just over 500 of 937 investors have complained to FOS. All investors now may have a good chance of getting most of their money back through FOS.
Investor and SEB investors’ action group member Paul Donovan said: ‘It has been a long battle but worth it in the end.
‘Investors would like to thank the FOS for their painstaking and thorough approach to the case. Also, the many MPs who offered support.’
Fiona Pitkeathly, who is also Providence Bonds Action group co-ordinator, 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.’
Investing in individual bonds
Mini-bonds and retail bonds can be risky investments, as highlighted above.
The key difference between the two is that retail bonds traded on the London Stock Exchange’s Orb market carry much greater regulation in terms of structure and promotion, whereas mini-bonds have very little.
The below gives the basic checklist when looking at a bond, but cash is always at risk as there is no FSCS safety net to pay out if the company goes bust.
– When looking at bonds, research all recent reports and accounts from the issuer thoroughly. You can find official stock market announcements including company results on This is Money here
– Check the cash flow is healthy and consistent. Also look at the interest cover – the ratio that shows how easily a firm will be able to meet interest repayments on its debt. This is calculated by dividing earnings before interest and taxes (known as EBIT) by what it spends on paying interest.
– It is very important to find out what the bond debt is secured against, and where you would stand in the queue of creditors if the issuer went bust. This should be included in the details of the bond offer but contact the issuer directly if it is unclear
– Consider whether to spread your risk by buying a bond fund, rather than tying up your money with just one company or organisation
– Inexperienced investors who are unsure about how retail or mini-bonds bonds work or their potential tax liabilities should seek independent financial advice.
– If the interest rate is what attracts you to the bond, weigh up whether it is truly worth the risk involved. Generally speaking, the higher the rate on offer, the higher the risk
– If the issuer is a listed company, before you decide whether to buy it is worth checking the dividend yield on the shares to see how it compares with the return on the bond. Share prices, charts and dividend yields can be found on This Is Money here
– Investors should bear in mind that it can be harder to judge the risk involved in investing in some bonds than in others – it is easier to assess the likelihood of Tesco going bust than smaller and more specialist businesses