Ombudsman orders Independent Portfolio Managers to compensate for unregulated bond collapses – will they pay up?

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Independent Portfolio Managers played a crucial role in the collapse of two unregulated bonds, Secured Energy Bonds and Providence Bonds.

Independent Portfolio Managers was an FCA-regulated company that issued financial promotions on behalf of Secured Energy and Providence. Without those FCA-regulated promotions, Secured Energy and Providence could not have been promoted to UK investors.

After those two bonds collapsed with total losses, investors in both Secured Energy and Providence made formal complaints to first Independent Portfolio Managers and then the Financial Ombudsman.

Just over a year and a quarter since it accepted the cases, The Financial Ombudsman has now began issuing rulings.

In three separate cases published in June and August, all three of them regarding IPM’s production of literature for Secured Energy Bonds, it has deemed that IPM was at fault for approving the promotion, and that it is responsible for investors’ losses, as they would not have invested if IPM’s promotion had not misled them into thinking that Secured Energy Bonds were “relatively safe”.

IPM must therefore repay their full investment (minus any interest received before Secured Energy’s collapse), plus interest.

Given that the FOS initially refused to even consider the cases on the basis that Secured Energy Bond investors were not customers of Independent Portfolio Managers, the FOS decisions represent an impressive victory for Secured Energy investors.

It seems nearly inevitable that the Ombudsman will also rule in favour of Providence Bond investors, assuming they also have complaints making their way through the system, as the circumstances were very similar.

However, I suspect that this may well turn out to be a Pyrrhic victory. I have previously noted that Independent Portfolio Managers’ last accounts (March 2016) state that it has net assets of £128k. Losses in Secured Energy and Providence total £15 million. Despite exercising its right to a six-month extension, Independent Portfolio Managers is now three months overdue with its accounts and there is an active proposal to strike off the company as a consequence.

Whether Independent Portfolio Managers has actually paid any of the Ombudsman’s awards against it is unknown.

The full ruling in the latest decision DRN0142726 is worth reading for anyone involved in the unregulated bond sector. In particular, the Ombudsman castigates IPM for portraying the “security features” of the bond, including the appointment of a Security Trustee and the fact that the bond was backed by SEB’s parent, CBD Energy in Australia, as if it made the bond less risky.

  • The invitation document did say there was a risk the security given to the Security Trustee and the guarantee given by CBD Energy might not be sufficient to repay the bondholders.
  • But the Invitation Document also gave the clear impression to potential investors that the Secured Energy Bond was a relatively safe investment in which investors had the protection of additional security measures making the investment less risky than other mini-bonds.
  • However CBD Energy was not, according to the information in the Invitation Document, in a strong enough financial position to be able to repay bondholders on demand if called to do so under the guarantee it gave.
  • And the Security did not have any mechanism to enable the Security Trustee to prevent SEB from disposing of secured property which was a fundamental flaw. It meant the Security Trustee could not prevent SEB from paying most of the money raised for investing in solar projects in the UK to its parent in Australia – who then went bust.
  • […] The Security system was not fit for purpose. The SEB bonds were no more secure, or less risky, than other non-secured mini-bonds.

Other issuers and promoters of unregulated bonds who heavily feature “security features” such as asset-backing and Security Trustees in their literature should take note.

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