Wealth managers braced for legal onslaught

Parts of the wealth management industry are braced for a year of legal assaults on a variety of fronts, according to leading private client law firm Edwin Coe.

The firm voiced its view after a group of 10 investors – former clients of HSBC, UBS, Barclays and Bramdean – approached Edwin Coe to file lawsuits over losses of about £90 million from exposure to Bernard Madoff’s $50 billion (£35 billion) alleged hedge fund fraud.

The firm has drawn attention to a number of catastrophes alongside Madoff in the past few months, which it says has left many wealth managers exposed to possible legal action. These include the collapse of funds from AIG, Lehman Brothers and the fall of Icelandic bank Kaupthing Singer & Friedlander (KSF).

David Greene, head of litigation for Edwin Coe, said those investors who have substantial holdings KSF through offshore bonds were a key risk. The bonds were bought by wealth managers from leading insurance firms see Citywire story here, which subsequently chased the high interest offered on KSF deposit accounts.   

These investors were offered little comfort when the Isle of Man authorities described claims from bonds as ‘low priority’, meaning that unlike regular depositors, they are not entitled to £50,000 under the Isle of Man Financial Service Compensation scheme.

The situation is exacerbated by the fact that those who are invested in KSF through insurance firms would only be entitled to share a pot of £20,000 compensation paid to each firm, which is likely to leave the investors with far less than their original investments.      

Greene said: ‘It seems clear that many advisers and wealth management firms were either promoting flawed schemes or failed to advise clients on the extent of the risks. In KSF, some advisers were selling bonds and deposits that were inherently unsafe due to the weakness of the Icelandic banking structure, which became apparent in the past year.’

Performance reviews for 2008 are starting to land on investors’ doorsteps. Legal action so far has been confined to the private banks, but Greene expects this to spread across the wealth management industry as investors learn how much money they have lost.  

Matthew Woods, partner at Withers, said his law firm had been approached by a number of wealth firms seeking advice on how the can protect themselves against legal action. Woods said: ‘Following a number of high-profile investment fund collapses, investors are considering whether a claim could be brought against their investment managers. 

‘Investment managers will be concerned about defending any claim made against them and will also be reviewing their procedures to ensure they are as robust as possible going forward.’