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Rapid Response Team: 0800 559 3500
Switchboard: +44 (0)203 947 1539
Rapid Response Team: 0800 559 3500
Switchboard: +44 (0)203 947 1539

Independent financial advisers (IFA’s) as well as their clients were among the many hit by an illegal £50M property investment scheme

Author: Azizur Rahman  2 June 2015
4 min read

Independent financial advisers (IFA’s) as well as their clients were among the many hit by an illegal £50M property investment scheme…which shows the dangers such schemes can pose to anyone.

Stack Of Coins

The view, perhaps unfairly held, is that the IFA’s never seem to be the ones who pay the price. They, the argument goes, recommend investments and financial products to their clients and earn their fee. If the investment pays off, they look good. But if the investment crashes and the investor loses a fortune, the IFA is not the one who suffers. They, their critics will claim, have simply taken their fee and moved on.

It is an understandable belief. After all, IFA’s rarely stand or fall on their recommendations – it is usually their clients’ cash that is at risk, however small that risk may be. But a recent case has shown that IFA’s can be as vulnerable as anyone else when it comes to property investment.

The case involves 50-year-old Richard Clay, a former partner of Arck LPP; a firm that created and marketed property investment financial products. Clay has pleaded guilty to fraud and IFA’s were among the many who were hit financially in the £50 million property scheme for which he is being prosecuted. Sentencing, which had been scheduled for February, has now been postponed but a confiscation hearing is still set for August.

Clay’s arrest followed an in-depth investigation which examined closely the formation and promotion of unregulated financial products that were accessible through IFA’s between 2006 and 2012. Estimates have put the amount invested at around £50 million, with losses put at the £45 million mark and participants seeing little or no return on their investment. What is notable is that IFA’s were among those left out of pocket – which goes against the common assumption we outlined earlier.

Quite why IFA’s felt the need to invest in Clay’s schemes may never become completely clear. Although maybe there is a clue in the comments made by the Serious Fraud Office (SFO) about the case. SFO’s Joint Head of Fraud, Jane de Lozey, said the case “was a complex and thorough investigation involving financial products which appeared innovative but were in fact part of an elaborate scam.”  Elaborate enough, it seems, to pull the wool over the eyes of seasoned IFA’s as well as rather more naïve members of the public. And a clear reminder to IFA’s of the risks they run whenever looking to make property investments either on behalf of themselves or others.

IFA’s are in a position of responsibility; handling large amounts of other people’s money. They must act carefully and take care that they act responsibly as their involvement will not necessarily end when they receive their fee. If there is any question of illegal behaviour at any point in the investment chain the IFA will be asked to account for their actions.

There was a case five years ago, where IFA’s were targeted by those looking to commit fraud. The IFA’s were convinced by a company called PCI of the value of a property investment scheme offering high returns. The IFA’s duly set about promoting it to their client base; many of whom were Britons living abroad. A total of 56 investors lost £1.93M; which was slipped into the private bank accounts of those committing the fraud (and running PCI) rather than into genuine property schemes. Five men were eventually jailed and the SFO was at pains during the trial to stress that the IFA’s involved had been “unwitting pawns’’; targeted and deceived by PCI and used as vehicles for carrying out the fraud.

The case may have emphasised the integrity of the IFA’s concerned but, like the ongoing Clay case, it also illustrates the precarious nature of the position of IFA’s. Yes, they are rarely risking their own money when it comes to investments – although they did with Clay -but they are at risk of jeopardising a lot of money on behalf of a lot of other people, as with PCI.

Investment Signs

Property investment has become a booming sector. But while this can be advantageous for IFA’s it also brings challenges. Before they recommend that anyone makes an investment in a particular scheme, they have to be sure that it is genuine and has a logical chance of providing the returns being claimed for it. Requesting and then analysing all available data on the scheme and demanding solid proof of genuine investment in it have to be seen as the basic starting checks rather than an afterthought or excessive inquisitiveness.

There will be some IFA’s who trust their judgement and point to a faultless track record of sound investments, impressive returns and success based on everything from a hunch to shrewd market knowledge. That may well be the case. But it is hard to see how any of these attributes would protect an IFA against the likes of PCI, who went out of their way to fool what were experienced IFA’s.

If making such checks appears too bothersome for a busy IFA, then they can hire legal experts to examine the nature of a scheme. It may even be worthwhile for IFA’s to seek legal advice to make sure they are legally compliant and doing nothing that brings them up against the provisions of business crime legislation. It is worth noting that if an IFA is in any way involved in devising or promoting a property investment scheme that, for whatever reason, goes wrong they will at some point come under scrutiny. At that point, they will have to be able to produce evidence that they were acting at all times professionally, competently and within the law. Anything less could mean investigation, prosecution and conviction or, at the very least, a heavily damaged professional reputation and client base.

No one is saying that advice from IFA’s on property investment schemes is not valuable. We would just like IFA’s to take time to check on the true value of their advice so that both they and their clients do not fall foul of fraud.

Azizur Rahman C 09369

Azizur Rahman

Senior Partner

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Aziz Rahman is Senior Partner at Rahman Ravelli and its founder. His ability to coordinate national, international and multi-agency defences has led to success in some of the most significant corporate crime cases of this century and top rankings in international legal guides. He is recognised worldwide as one of the most capable legal experts regarding top-level, high-value commercial and financial disputes.

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