They are among hundreds of victims of ARM, a Luxembourg-based vehicle which issued bonds backed by traded life policies now blacklisted by the Financial Services Authority, of Catalyst – its UK offshoot which distributed the bonds, and of Rockingham Independent, an English IFA firm responsible for a significant proportion of the sales, which was fined by the FSA and has now gone bust.
But the FSCS said on Thursday: "While we accept that Rockingham may potentially have given bad investment advice to some investors in respect of ARM investments, we do not consider that such advice can properly be said to have caused the losses which investors may have suffered.
"Therefore, FSCS does not consider that Rockingham owes a civil liability in respect of losses that claimants may have suffered in relation to ARM investments."
Cat MacLean, at Edinburgh law firm MBM Commercial, said the FSCS decision was "a bitter blow for investors".
Now an action group ARM Investors Help, formed in Edinburgh, is considering taking the decision to judicial review. Co-founder Alan Shanks said: "Their decision seems to ignore the fact an investment regarded by the FSA as unsuitable for retail investors was not only sold to retail investors by Rockingham, but sold as a low-risk investment."
He said the decision was contrary to the FSCS's stated approach of considering each claim individually, and inconsistent with a ruling by the financial ombudsman service (FOS). "We will continue to explore the compensation claim avenues via the FOS on behalf of all investors, and the fight goes on," he added.
ARM has been in default for more than 18 months on payment of coupons (interest) on bonds it issued between November 2007 and May 2010. Many investors are pensioners who were persuaded to sink all or a large part of their personal wealth into ARM bonds and are now in financial difficulty. ARM claims it is restructuring the fund with a view to reinstating coupons, but has refused all communication with investors. It has failed to respond to an order from Ernst & Young, on behalf of the Luxembourg regulator which never authorised ARM, to provide individual investor accounts.
The action group has 250 members and investor mandates account for more than 11% of the ARM bonds' investment value – above the 5% needed to allow a bondholder group action.
ARM was set up in 2007 to invest in Traded Life Policy Investments (TLPIs), but the business model required ongoing sales of bonds to meet costs, premiums on the policies, and coupons to investors, until the TLPIs matured.
In 2009 the Luxembourg regulator instructed ARM to stop issuing bonds, although ARM continued to accept receipts from investors, but it was not until 2010 the FSA asked Catalyst, which had common directors with ARM, to stop sales.
In 2011 ARM stopped paying coupons and suspended bond redemptions, Catalyst was referred to the FSA's enforcement and financial crime division, and the FSA issued its warning that TLPIs were "toxic" products unsuitable for retail investors. Rockingham was fined £35,000 in September 2011, with two directors and an adviser handed FSA partial bans, and went into liquidation last year. But a new firm, Investing for Income, with the same address, had appeared in 2011, with former Rockingham directors and advisers listed as co-owners, directors or advisers.
In fining Rockingham, the FSA said: "Customers assessed as moderately cautious, balanced, and moderately adventurous were all advised to make highly concentrated investments in the ARM Bond where return of capital was not guaranteed." For many that meant 100% of their pension funds. The FSA said: "Our view is that TLPIs are complex, high-risk products not suitable for the majority of retail clients."
Yet according to the FSCS, Rockingham "does not owe a civil liability to investors".
Gordon Pullan, the action group's other co-founder, said: "Realistic investors understand the residual value of any restructured ARM will leave a financial loss.
"Some are waiting for the outcome of the restructure, others have submitted claims to the FOS and FSCS.
"There are a number of possible entities against which claims might be made, including Rockingham and Catalyst, but also PI (professional indemnity) insurers of other IFAs, Goodbody the Irish Stock Exchange listing agent and SIPP providers."
Ms McLean said it was "difficult to understand the rationale" of the FSCS decision. She added: "Investors may seek to have the decision overturned by judicial review but given the apparent FSCS reasoning that the cause of the investors' losses was Luxembourg's financial regulator refusing to grant a licence to ARM, rather than negligent advice by Rockingham, a judicial review may not be straightforward.
"Investors should turn their attention to UK distributors and consider submitting complaints against them to the Financial Ombudsman Service or litigate through the courts ."
You can contact Arm Investors Help at firstname.lastname@example.org