Sometimes clients ask us what happens if CFS, Cofunds or their fund manager become insolvent. Do they lose their money? In general the answer to this is “no”.
What if CFS collapses?
When you invest, you make your cheque payable to Cofunds or the fund manager (for example Jupiter or Fidelity). CFS never holds client money or assets, and thus if CFS were to become insolvent it would make no difference whatsoever to your investment. Cofunds or Jupiter/Fidelity would change the name of the broker from CFS to themselves, but there would be no other change.
What if Cofunds or fund managers collapse?
Cofunds and fund managers are bound by very strict rules to segregate and identify client money and assets – and client investments are held by independent trustees, which gives a further level of protection. Fund managers cannot use client assets to pay their bills: to do so would be a criminal offence. The industry is efficiently policed by the Financial Services Authority, which has been set up by the Government to protect the consumer, and we believe this makes it effectively impossible for client assets to be misused in this way.
Your money is at risk from the market, but not from its managers (unless there is fraud): it is invested in a number of companies within a fund, in various sectors and with differing levels of risk, according to the type of fund. Thus UK equity funds invest in UK quoted companies, and are generally viewed as less volatile, whilst certain overseas or specialist sector funds may invest in companies with a greater potential for reward but also much higher volatility.
It is the strength (or weakness) of these companies within the funds that determines how safe your investment is. Fund managers always try to pick the best performers, and overall the performance of equity funds over the years has been much better than (e.g.) deposit accounts, but of course the value of investments can go down as well as up: a fund manager can pick a dud company, or the whole market can slide. The important point to note is that it is these factors which, more than anything, will determine the value of your investment, not how well Cofunds or a particular fund manager is doing as a company.
It follows from this that in principle it would be possible for a fund to be doing well whilst its fund manager is in trouble. There have been one or two instances of this over the last 15 or 20 years, usually where a fund manager has had problems in another part of its business. In practice this has given rise to a takeover, where another fund manager with sufficient resources to deal with the problem areas has acquired a fundamentally sound business.
It should be noted that Cofunds would anyway be extremely unlikely to collapse, since it is 25% owned by L&G, the UK’s strongest Life office, with other shareholders (Jupiter, M&G, IFDS, New House Capital and Threadneedle) amongst the City’s best known names.
What about takeovers and mergers?
Takeovers and mergers are a feature of the investment industry (and indeed other industries); and it is important to reiterate that these do not affect the fundamental value of the underlying funds or individual holdings therein. (Sometimes there may be a small change in price – usually beneficial – as investors consider the consequences of coming under the umbrella of a larger fund management organisation).
Conclusion: it is the funds that matter, not who holds or deals them
In summary, if Cofunds or your fund manager (Jupiter or Fidelity for example) were to collapse, merge or be taken over, you would still hold units in their funds; and these should not lose value as a result of the collapse, merger or takeover, since they are dependant upon the value of the underlying companies. (There may be some movement in price whilst rumours fly as to whether particular star managers are coming or going). There is further comfort in that firms holding client assets are required to keep sufficient liquid reserves to ensure the costs of returning or transferring assets do not eat into your investment.
Yet people still lose money, don’t they?
People ask, what about Robert Maxwell, or the losses from Split Capital Funds? These are two kinds of situation, one of which was criminal and the other not.
Robert Maxwell plundered company pension funds in order to support his companies. In the 15 years since, the Personal Investment Authority and the Financial Services Authority have considerably strengthened regulation so as to prevent such misuse of ring-fenced assets. It is of course impossible to state categorically that no such event could occur, but in our view it is inconceivable, particularly within the major fund managers: there is a very high level of regular detailed reconciliation and reporting, and such a fraud would require the collusion of a significant number of senior personnel in a criminal conspiracy; whereas it should be noted that the Maxwell case involved a Group that was effectively private, and dominated by one personality with access both to company and pension scheme funds. This is not the case for any of the major fund managers with which CFS deals.
The Split Capital Funds that came to grief some years ago always carried some element of risk. Their performance was conditional upon the behaviour of the market, but at the time of their issue in 1998-99 a market collapse was considered very unlikely. Then a few years later the market plunged. Some investors successfully claimed that their particular adviser or product provider had not made the risks sufficiently prominent, but it was never doubted that these risks had been part of the original deal.
Where to go for redress
Despite all that has been said above, what can an investor do if an investment collapses? If it is due to simple poor performance, this is one of the risks of investing, and there is little that can be done. Investors should nevertheless satisfy themselves that any advice was given in accordance with standards laid down by the FSA (CFS of course does not give advice). In addition, if it can be established that there has been fraud or negligence on the part of Cofunds or the fund manager, investors should seek redress. In the event of major fraud it is likely that there would be a group action in which the investor might wish to join. In the event of negligence or error on the part of Cofunds or a fund manager, redress should be sought by complaining to Cofunds or the fund manager as appropriate. If the matter is not resolved satisfactorily, the investor can apply to the Financial Ombudsman Service (info@financial-ombudsman.org.uk or telephone 0845-080-1800)
As a final resort, if the loss is due to the fraud or negligence of an intermediary, fund supermarket or product provider, which has collapsed and is therefore unable to pay up, recourse can be had to the Financial Services Compensation Scheme (info@fscs.org.uk or telephone 020-7892-7300). Currently the most FSCS will pay is 100% of the first £30,000 and 90% of the next £20,000 – an overall maximum of £48,000, but this is in the process of changing to 100% of the first £100,000, in the wake of the Northern Rock affair.
Incidentally, Northern Rock provides some example of regulation and supervision at work. In the event, shareholders in Northern Rock may have suffered, but not a single depositor has lost money.
We hope this summary is helpful, but please do not hesitate to contact us (020-7384-7300) if you require any further information or explanation.
October 2007
