There have been a number of developments recently that affect investors in bonds issued by ARM Asset Backed Securities SA (ARM), a securitisation vehicle based in Luxembourg. We take a look at some frequently asked questions.
ARM issued the ARM Assured Income Plan and ARM Capital Growth Bond products. These are based on senior life settlement policies bought in the secondary market and sold, via distributors, to investors in the UK and Europe. The ARM bonds are listed on the Irish Stock Exchange but are currently suspended from trading.
Application for authorisation
ARM is not regulated but had applied to the Luxembourg financial services regulator, the Commission de Surveillance du Secteur Financier (CSSF), for authorisation. The CSSF announced on 29 August 2011 that it had refused to grant a licence to ARM.
ARM appealed this decision on 29 September 2011, which it confirmed in a statement to the Irish Stock Exchange.
ARM brought a petition to the Luxembourg Court on 29 November 2011 to get a judicial review of the CSSF’s decision to refuse its application for a licence. On 6 December 2012, the CSSF informed that the Luxembourg Court rejected the petition lodged by ARM. ARM appealed the decision but this was dismissed by the Luxembourg court on 21 August 2013. ARM will now be placed into liquidation.
E&Y appointed Supervisory Commissioner
At the request of the CSSF, the Luxembourg court decided on 10 November 2011 that Ernst and Young (E&Y) would be appointed as supervisory commissioner to ARM in place of the CSSF. E&Y must now authorise all decisions affecting investors’ money, including any proposed agreement with a third party.
In line with the Law, the judgment ordering the dissolution and the liquidation of ARM will terminate the mandate of the supervisory commissioner.
Latest developments
We announced on 14 November 2011 that we had taken action to prevent the release of pending investors' money from the accounts in which it is held. See question 2 for the latest on pending investors’ money.
On 14 November 2012, ARM issued a statement, via the Irish Stock Exchange, announcing the sale of the life settlement policies in its portfolio to Financial Credit Investment I Limited (FCIL).
We were aware that there was to be a sale, but not of the detail. As ARM is not regulated we do not have any powers or duties in relation to ARM. Therefore, we are unable to make a judgement on the transaction.
On 3 October 2013, we declared Catalyst Investment Group Limited in default. This means that, in our view, there are protected claims outstanding against Catalyst that it is unable, or is unlikely to be able, to meet.
On 4 October 2013, we issued notices against Catalyst and a number of connected individuals.
Frequently asked questions
Information for investors
- What is the difference between bondholders and pending investors?
- What can pending investors do?
- Will investors get their money back?
- What is the FSA doing to protect investors?
- Where is pending investors’ money being held whilst this freezing order is in place?
ARM and authorisation
- How is ARM authorised?
- Is ARM covered by the Financial Ombudsman Service and FSCS?
- What is the latest on ARM’s legal challenge concerning its authorisation?
Catalyst: ARM’s UK distributor
- How is Catalyst Investment Group involved?
- Why didn’t the FSA act in July 2009 to stop Catalyst marketing these investments when it was discovered that ARM was not authorised to issue the bonds?
- Why did the FSA not take steps to alert investors that these bonds were being issued without an authorisation from October 2009?
- Why weren’t investors told about the formal requirement, made on Catalyst in August 2010, until September 2011? Was this solely the decision of the FSA or did Catalyst ask for it not to be made public?
- Do the Financial Ombudsman Service and FSCS cover ARM’s UK distributor, Catalyst or financial advisers that sold the ARM product?
Information for investors
1. What is the difference between bondholders and pending investors?
ARM bonds were marketed in several ‘tranches’. ‘Bondholders’ made investments backed by bonds in tranches 1-8, sold between 2006 and 2009.
There is also a group of ‘pending investors’ for tranches 9-11, purchased after Q4 2009. While these investors gave money to ARM, the bonds in tranches 9-11 have not been issued due to the failure of ARM to gain authorisation from the CSSF.
Together ARM bondholders and pending investors are known as ‘investors’.
Money paid by pending investors for bonds between September 2009 and December 2009 (tranche 9) was transferred to ARM in December 2009. This money has been spent on premiums, coupons, refunds and expenses. Money paid by pending investors after December 2009 (tranches 10 and 11) was not transferred to ARM and is held by receiving agents.
2. What can pending investors do?
Due to the uncertainty regarding the ownership of the pending investor money, in November 2011 we took action to ensure that what was left of the pending investor money would stay held in the bank accounts of ARM’s receiving agents until such a time that the ownership could be satisfactorily determined. This action was taken to protect investors from the risk of what might be their money being further dissipated.
Since then, ARM provided, in July 2013, two legal opinions. ARM’s contention was that the effect of these legal opinions was that the pending investor money properly belonged to ARM.
We have been considering the effect of ARM’s opinions when it became aware that ARM was to be put in liquidation. As a result it is our understanding that the liquidator will take over the affairs of ARM. Even taking into account ARM’s legal opinions, there remains such uncertainty over the status of the pending investor money that it is appropriate to allow the liquidation process to commence before making any decision to remove or vary the Notices imposed in respect of the money.
Pending investors who want a refund should still submit a formal request to ARM to preserve their position as a creditor of ARM. Affected investors may want to seek legal advice in any event. Once we become aware of who is to carry out the liquidation, and what investors should do in respect of the liquidation, we will make this information available on the website.
Pending investors should be aware that not all the money invested in tranches 9-11 was kept separate from other funds by ARM. Therefore, there is uncertainty about how much of the money, held in these accounts, could theoretically be refunded to pending investors. In 2010 and 2011, a minority of pending investors accepted offers from ARM to return their invested funds.
3. Will investors get their money back?
At the request of the CSSF, the Luxembourg court decided on 10 November 2011 that Ernst and Young (E&Y) would be appointed as supervisory commissioner to ARM in place of the CSSF. E&Y must now authorise all decisions affecting investors’ money, including any proposed agreement with a third party.
E&Y now needs to authorise all payments by ARM. At present this means payments are suspended, including redemptions of its bonds and coupon payments.
Investors should be aware that Rockingham Independent Limited, which sold bonds based on senior life settlement policies that were issued by ARM Asset Backed Securities SA (ARM), is now in liquidation.
In July, the FSCS announced, that it was reviewing new evidence in claims against Rockingham, relating to advice that the firm gave clients to invest in ARM bonds. It will aim to update on the outcome in November 2013.
4. What is the FSA doing to protect investors?
ARM is not and never has been authorised by us. We do not have any powers over ARM as it is unauthorised and based in Luxembourg. However, we have requested that ARM consider reimbursing pending investors.
In addition, we announced on 14 November 2011 that we had taken action to prevent the release of pending investors' money from the accounts in which it is held. This adds to the existing ruling which had already suspended any payments made by ARM.
Investors should be aware that money paid by pending investors for bonds between September 2009 and December 2009 (tranche 9) was transferred to ARM in December 2009. This money has been spent on premiums, coupons, refunds and expenses.
There is considerable legal uncertainty in relation to all pending investors’ money, which may belong to certain or all pending investors rather than ARM.
We had previously taken action to prevent the release of pending investors' money from the accounts in which it is held. See question 2 for more information.
On 28 November 2011, we published consultation on guidance that would, strongly recommend traded life policy investments – such as the ARM bond – not being sold to ordinary retail investors in the UK as the policies are unlikely to be suitable for their investment needs. We will be publishing more information in due course.
With regards to the takeover bids for ARM and its assets, we are liaising regularly with both the ARM board and E&Y to try and ensure that the choice of proposal is in the best interest of UK investors.
5. Where is pending investors’ money being held whilst this freezing order is in place?
In order to protect pending investors, we took the step of freezing the money which was held in Natwest, HSBC and Jarvis Investment Management Limited accounts. This was to prevent investors’ money being used for day-to-day business expenses.
ARM and authorisation
6. How is ARM authorised?
ARM is not and never has been authorised by us. We do not have any powers over ARM as it is unauthorised and based in Luxembourg.
We discovered in July 2009 that ARM did not have authorisation in Luxembourg. The firm applied to the CSSF for authorisation later that month.
The CSSF told the firm in November 2009 that its products should not be sold until the issue of authorisation was resolved. The CSSF decided not to authorise ARM, as announced on 29 August 2011.
7. Is ARM covered by the Financial Ombudsman Service and FSCS?
No. The Financial Ombudsman Service resolve disputes between consumers and financial firms regulated by us, while the Financial Services Compensation Scheme (FSCS) is the UK's compensation fund of last resort for customers of financial services firms authorised by us.
ARM is based in Luxembourg and is not, and never has been, authorised by us. Therefore investors cannot complain to the Ombudsman about ARM and it is not covered by the FSCS.
8. What is the latest on ARM’s legal challenge concerning its authorisation?
On 6 December 2012, the CSSF informed that the Luxembourg Court rejected the petition lodged by ARM.
ARM appealed but this was dismissed by the Luxembourg court on 21 August 2013. ARM has now exhausted its appeal rights and will be put into liquidation.
Catalyst: ARM’s UK distributor
9. How is Catalyst Investment Group involved?
From 2006, Catalyst had been distributing ARM bonds, via IFAs, to UK investors. It has sold the ARM Assured Income Plan and ARM Capital Growth Bond products to 2,079 UK customers with a total value of £75.5m.
We authorise Catalyst and found that the firm was still taking in new money from UK investors but not issuing bonds. See question 11 and question 12 for more information on this.
10. Why didn’t the FSA act in July 2009 to stop Catalyst marketing these investments when it was discovered that ARM was not authorised to issue the bonds?
In July 2009, we told Catalyst that ARM did not appear to be authorised. At that stage, it was not clear to us whether ARM needed to be authorised. That same month ARM formally applied for authorisation in Luxembourg and it also took steps to transfer to Ireland in May 2010.
In April 2011, the Irish regulator, the Central Bank of Ireland, gave ARM conditions that it would have to satisfy in order for the Central Bank of Ireland to re-instate its statutory exemption from the requirement to be licensed. ARM was not able to meet the conditions so the exemption was never re-instated. In August 2011, the CSSF announced that it would not authorise ARM either.
This has been a lengthy process but if ARM had been successful in becoming authorised in Luxembourg or transferring to Ireland the bonds could have been issued. If we had intervened, it is likely that this would have caused a run with a large number of investors withdrawing their money and ARM and/or Catalyst would have collapsed putting investors’ money at risk.
Our supervisory action ensured that pending investors were told that the ARM bonds were not covered by the FSCS and they had two opportunities to withdraw their money.
No new money was invested in the time between us discovering ARM was unauthorised and us announcing that we had taken action.
11. Why did the FSA not take steps to alert investors that these bonds were being issued without an authorisation from October 2009?
It was not known at this point whether or when the CSSF would authorise ARM to issue bonds. However, in November 2009, the CSSF told ARM to suspend bond issues until it had reviewed ARM’s application for authorisation. This should have halted all marketing and distribution of bonds.
When we found out that bonds were still being marketed in the UK, and money was still being collected from investors we acted to put a stop to this.
On 26 May 2010, we put in place a formal requirement to stop Catalyst from continuing to issue new ARM products. We followed this with another formal requirement on 17 August 2010.
We told Catalyst to write to investors who, since 2 September 2009, had paid money but not received a bond. These letters offered investors the opportunity to withdraw their investment. It did this twice.
12. Why weren’t investors told about the formal requirement, made on Catalyst in August 2010, until September 2011? Was this solely the decision of the FSA or did Catalyst ask for it not to be made public?
We decided not to publish the formal requirement at the time because, in our opinion, it could have caused a run on ARM with a large number of investors looking to withdraw their money.
A run would have reduced the value of the bonds and investor returns. We believed this would not be in the interest of all investors whilst ARM was still waiting to hear on its application for authorisation.
When CSSF decided not to authorise ARM, in September 2011, it meant that all payments by the firm were suspended, so the original reason for not publishing the supervisory order was no longer relevant.
We are now investigating Catalyst’s role in distributing the ARM Assured Income Plan and ARM Capital Growth Bond products in the UK.
13. Do the Financial Ombudsman Service and FSCS cover ARM’s UK distributor, Catalyst or financial advisers that sold the ARM product?
If you are unhappy with a financial product or service promoted, sold or provided by a firm regulated by us you should firstly complain to the firm involved. If you are not satisfied with their response, the Financial Ombudsman Service may be able to help. Catalyst and IFAs are UK regulated firms and so are covered by the Ombudsman, however this does not mean that all complaints will be upheld
Similarly, the FSCS protects customers of financial services firms authorised by us, so may be able to cover you if a firm is unable, or likely to be unable to pay money owed to their customers.
The FSCS has stated that it will issue an update for investors during November 2013. This will cover the FSCS position in relation to claims against Catalyst, Rockingham and other IFA’s involved in the sale of the ARM bond.