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Spectre of £400m compensation bill looms as FSCS values Harlequin at nil

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  • 02/03/2015
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Spectre of £400m compensation bill looms as FSCS values Harlequin at nil
Financial advisers could be on the hook for hundreds of millions of pounds after the latest twist in the Harlequin saga in which the Financial Services Compensation Scheme (FSCS) has written down the value of the investment to nil.

In a document from the FSCS seen by Professional Adviser, dated 12 February and marked ‘compensation calculation’, the body lists the value of a Harlequin Property investment as £0.00.

A FSCS spokesperson confirmed the decision.

“Where applicable we will disregard the residual value in respect of Harlequin investments,” they said.

The move opens the floodgates for the FSCS to pay the thousands of Harlequin investors compensation on the full amount they put into the unregulated scheme, up to a £50,000 limit.

With around £400m originally invested in Harlequin, the compensation bill is set to run into hundreds of millions of pounds, putting it on a par with other investment disasters like Keydata and Arch cru.

As in those cases, the bulk of the cost of the compensation is likely to be borne by investment advisers.

The decision by the FSCS further undermines claims by Harlequin chairman David Ames in Juy 2014 that the FSCS backs a controversial trust he is trying to use to rescue his troubled overseas property scheme – a claim the FSCS denied.

In a conference call with about 70 Harlequin investors, Ames said the FSCS supported the Harlequin trust, and that investors must join it or risk missing out on compensation, Professional Adviser revealed.

High risk unregulated property investment scheme Harlequin has suffered a series of catastrophic problems since January 2013, including warnings from the regulator and an ongoing investigation by the Serious Fraud Office.

Investors – who put hundreds of millions of pounds of their pension money into the scheme expecting a ‘guaranteed’ monthly income from rents on Caribbean tourist villas – have been left without the promised income or even access to their capital, after work stopped on the Harlequin resorts and its sales arm entered liquidation.

Most Harlequin investors put money into the scheme via their self-invested person pension (SIPP).

The FSCS has said it is “satisfied that the IFAs may be legally liable for [SIPP] investment losses”.

“This is on the basis that those IFAs cannot restrict their advice to the suitability of the SIPP, without considering the suitability of the investments to be held within the SIPP,” it said.

In January the FSCS was still valuing Harlequin investments at 100% of the original amount invested, and said it would only pay redress on claims against advice firms no longer trading where the investor had invested via their pension and could demonstrate lost pension growth.

But in February it bowed to pressure from lawyers acting for investors and said it will compensate SIPP claimants for losses in the value – not just the growth – of their investments in Harlequin.

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