The Danske Bank Equity Release Fiasco
Surfing the web in search for information on the so-called equity-release fiascos, I came accross a very interesting article in respect of Danske Bank being sued by around 100 customers over the loss of 80% of their investments on an financial product that, allegedly, the bank sold as being low-risk.
According to the bank, the investment project was sold only to wealth customers, who were provided with adequate information about the risks. According to the financial experts at Oslo University, the project was presented to the customers as being far less risky than it actually was, and according to the lawyers dealing with the case, their clients would have never invested in the product if they had been fully informed of the risks.
I happen to have one client in the same situation, although with a distinct difference. He was not sold the product directly by the bank, but by an insurance broker based in Alicante, registered with the DGS (Insurance Directorate General) to sell life insurance policies.
The Facts of the Case
Who’s Who
- Danske Bank: a Northern European financial services provider, authorised by the Danish Financial Supervisory Authority. It is currently the largest bank in Denmark and is listed on the stock exchange.
- OFS Spain (Overseas Financial Services): An insurance services intermediary company based in Calpe. This company is not authorised by the regulator (CNMV) to operate in Spain as a financial advisor even though they call themselves Overseas Financial Services. They do sell, however, anything from aircraft to sweet potatoes and virgin coconut oil, and as of late, the principal sells light-bulbs.
- L.V. (OFS Principal): MLIA (Dip) and Financial Planning Manager, according to his business card. L.V. is registered by the DGS to operate as an insurance intermediator, given his prior registration with the Irish Financial Regulator, pursuant to the European Communities (Insurance Mediation) Regulations 2005, which gives effect in Irish law to the European Communities Insurance Mediation Directive. According to the regulator, insurance intermediaries can provide general, life and health insurance products to consumers, depending on the type of insurance companies from which they hold an appointment. And that’s about it. L.V. is not regulated or authorized to provide financial advice in either country.
- Inter Alliance WorldNet Insurance Agents & Advisors: An “umbrella” association that provides compliance and regulation for insurance business. It is registered in Cyprus and is registered to operate in Spain, through the appointed insurance brokers, as well as in the United Kingdom, but the FSA (Financial Services Authority) still recommends enquiring for further information, since they are “passported” EEA firms.
- Inter-Alliance Group plc (IAG Group): Mentioned in LV’s business card as part of some operating joint venture: after merging with Millfield Group plc, it went bust, not before being prosecuted by the FSA for regulatory irregularities that found the directors to have failed to exercise due candour, skill, care and diligence when providing what seemed a very important letter. They are no longer authorised by the FSA (Financial Services Authority), and have never been authorised in Spain, by the CNMV.
- Inter-Alliance International (IAI): mentioned in LV’s business card as part of some operating joint venture. It´s website is under construction. De Vere apparently bought it for 750.000 GBP back in 2005.
- The “wonder” financial product offered through LV and OFS by Danske Bank: The wording of the contract for this product is so complicated that I have sent it to a specialized financial-forensic expert to get some form of understanding (The Courts will also need it). Hereby some excerpts that will help understand why I can only mumble when reading the contract: Investment Focus: Funds-of-Funds, funds automates rebalancing and re-investments, Defensive low-duration bonds, Overweight credits (not people 🙂 ), Strategy: Cautious (I did understand this one!!), arrete de compte, pari passu (it’s got to be a different language), Actual Security Ratio or Requested Security Ratio, which means, according to Danske Bank, the weighted average of the Requested Security Ratio for each individual security in the pledged portfolio (self-explanatory, no doubt). Fidelity Funds Sicav (non-geared), Individual Capital Assurance with PanEuroLife S.A.- policy nos. DFD00009-DFD00013,Bonds DI GIbIdeksobAK, NykVar31E F3H 11…, and it goes on and on, till you contract perpetual insomnia.
- My client: A 72 year-old retired mariner owner of a Costa del Sol unencumbered retirement home, who was sold a product that would bring him an income, a cash lump sum (which he partly used to buy a little boat) and no IHT for his offspring. As a consequence of the fiasco, he was forced to sell the boat to try to mitigate the losses of the “Luxembourg wonder-bond”, has been now forced to sell his home and has had to start working again.
Brief Description of Events
- As one can imagine, the pitch was clear:
Client: I am a bit concerned, rather apprehended, I don’t quite understand how this all works, it´s all pretty confusing, baffling…!
Broker: But why? Don’t you worry, this is a simple over-the-counter equity release programme that, by mortgaging YOUR unemcumbered retirement home WHICH you bought with YOUR life savings, and taking an upfront draw-down for you to enjoy, will allow you to have a monthly income, reduce your IHT exposure and bring you happiness, it’s crystal clear, trust me, no word of a lie!
- Quoting the broker at the end of 2004 (excerpt from email by LV):
“Neither Danske Bank nor ourselves stipulate that you must use a tax advisor to apply for the scheme – we always recommend clients obtain effect and individual tax advice before going into the scheme, but it is not a pre-requisite as Danske Bank are very experienced in this area and can guide you substantially (John Lundskov, in particular).”
- Quoting Danske Bank August 2010 (excerpt from email by Morten Runo Waaben):
Dear Xx, As mentioned, I need to speak to you soonest possible. It is now critical that you get your property sold. Together we made an action plan on the 8th of June 2009 for selling your property in Alhaurin. At the meeting you mentioned that your boat was for sale as well, have you sold any?
Is this Danske’s substantial guidance the broker was referring to?
- Quoting my client August 2010:
Evening Morten, we are in the process of renting the house for one year to try and raise some money for living and we will move into a small apartment…
At 72, and after having taken up a new job!
And what about the broker in 2010? Well, he is back selling Equity-Release schemes again, alongside light-bulbs and virgin coconut oil.
The (I)Legals of the Case
- OFS and LV are and were not authorised to offer in Spain financial or investment advice, other than life insurance policies, according to the DGS (Insurance Regulator) and the CNMV (Financial and Investments Regulator).
- Inter Alliance WorldNet Insurance Agents & Advisors are and were not authorised to offer in Spain financial or investment advice, other than insurance policies, according to the DGS (Insurance Regulator) and the CNMV (Financial and Investments Regulator).
- Danske Bank is authorised to operate in Spain. Danske bank however failed to comply with a number of provisions, namely that of employing registered and regulated individuals and companies to offer, market, intermediate, sell and follow up it´s highly volatile and complex financial Luxembourg-based products, pursuant to the MiFID (Markets in Financial Instruments Directive). Danske Bank failed to ensure that:
- The intermediary individuals and companies used were registered as either a regulated ESI (Empresa de Servicios de Inversion) or an EAFI (Empresa de Asesoramiento Financiero), in accordance to the CNMV.
- The products were not sold indiscriminately, or sold without offering full, mandatory, unqualified and transparent information, exercising good judgement when disclosing the risk (get a bus driver to fly an F-16 and you´ll see what happens).
- The client’s profile was examined carefully so that he was offered only a financial product that was adequate or consistent with the aim pursued (a person aged 70 years of age with no prior experience in financial invesments, attempting to obtain a regular montly income, would have hardly gambled his life earnings away).
- The contracts used were pre-approved by the regulator (I have not found trace of compliance with this obligation).
The above failures have seen my client’s “cautious low-risk” bond investment dwindle from €850K to €350K thanks to the “conservative” approach of Danske Bank’s Luxembourg financial “advisors”. He has effectively now lost €500K of the equity he released. In addition to this, the promised income has converted into a mortgage-loan payment which he cannot afford and his retirement previously unemcumbered Costa del Sol home is now threatened by Danske Bank’s heavies who are forcing him to sell everything, or face legal eviction.
So where do we go from here? Well, I suppose, take some time to read, examine and draw conclusions from the very recent and very lenghty Supreme Court ruling of the 17th of June 2010, that has forced Caja Rural del Mediterraneo/Rural Caja to refund over €3 million for selling complex high-risk products to retired/conservative investors without fully disclosing the associated risks.