04Jan

A Manchester-based unregulated collective investment scheme administrator has been ordered to pay restitution of £203,007, which reflects the profits it received from its role as operator of the Connaught Income Fund, Series 1. Had it not been for the evidence of financial hardship it was able to provide, the firm would also have been fined £10 million.

For the first 15 months of the fund’s operation, until October 2009, the fund went by the name of Guaranteed Low Risk Income Fund, Series 1. The firm initially marketed the fund as a low-risk investment offering a guaranteed, fixed return of between 8.15% and 8.5% per quarter. The Fund was promoted in this way until around May 2011, when the FCA published a warning that statements being made about the Fund’s risk profile were misleading. The Fund was not in fact low risk nor was the income guaranteed. A description of ‘low risk’ was never likely to be appropriate given the UCIS lent all its assets to the Specialist Partner, an unregulated private company, which in turn invested directly in property in a specialist sector.

The Fund was designed to allow the Specialist Partner of the Fund to draw down money invested in the Fund to provide short term bridging finance to commercial borrowers in the UK property market. The FCA says that the firm which has been subject to the enforcement action failed in its duty to carry out appropriate due diligence on the Specialist Partner, and also on the Specialist Partner’s parent company, which claimed to guarantee the Fund’s income and the Specialist Partner’s borrowing from the Fund.

A further criticism made by the FCA is that the marketing materials for the Fund contained misleading statements that the Fund’s assets would be used for short term lending – for periods of three to six months – when in fact many of the Fund’s assets were lent for significantly longer terms, such as two years or more.

Other potentially misleading statements in the marketing material included:

  • The Fund’s assets would be lent at conservative loan-to-value ratios to increase the likelihood of full recovery in the event of default
  • Lending from the Fund for bridging loans would be secured

The FCA makes no criticism of the Specialist Partner or its parent firm.

Scott Robert are compliance consultants based in Manchester delivering solutions to regulated businesses.