“Lumiere case shows that investors need much better protection“

Monday 14 September 2020

‘A catalogue of failures’ at an financial advisory firm that led to Islanders losing millions of pounds is further evidence that investors need better protection, according to a lawyer who specialises in regulation.

Advocate Olaf Blakeley said that the Lumiere case - which led to investors collectively losing £3m - highlighted that the current system was broken.

Last week, the Jersey Financial Services Commission published its conclusions from its investigation into Lumiere Wealth Limited.

It found that the Jersey-based financial services business, which went into liquidation in October 2016, committed a serious catalogue of failures, breaching Jersey’s legal and regulatory regime.

Lumiere’s former Managing Director was jailed for seven years in November 2018 for his part in the collapse. Christoper Byrne invested clients’ money in a Ponzi scheme which collapsed in 2016. He hid the high risk of investing in the fund and the fact that its owner was actually a major shareholder in Lumiere.

But some of the pain for investors could have been avoided if the JFSC required the financial advisory industry to have suitable professional indemnity insurance, according to Advocate Blakeley.

Pictured: Advocate Olaf Blakeley specialises in regulatory law.

“As the JFSC Director General has stated, by the time the JFSC catches up with wrong-doing, investors’ money can be long gone. This demonstrates the necessity for adequate professional indemnity insurance in the industry.  

“Sadly, the system currently in place does not work and is not fit for purpose and an alternative is essential.  

“This observation is nothing new as it was voiced 13 years ago by a Court of Appeal judge, Richard Southwell QC, in the Jersey case concerning Alternate Insurance Services Limited.

“The Royal Court said then: ‘The JFSC should consider with even more urgency what can be done to ensure that all those whom it regulates are fully insured in every respect. An alternative would be to establish a mutual scheme for insurance, such as some professions in England and Wales and elsewhere have long established.’

“13 years later, nothing has been done.”

JFSC Director-General Martin Moloney.

However, JFSC Director-General Martin Moloney said that insurance cover only worked if advisors followed the rules.

“To meet our regulatory requirements, licensed businesses are required to secure adequate professional indemnity insurance, relative to their activities. The level of cover will vary from firm to firm. 

“However, as every jurisdiction recognises, there are limits to how much reliance can be placed on professional insurance to really protect investors. 

“For example, for such insurance to remain valid there are ongoing obligations on the business. If the business acts in ways which don’t meet those obligations, an insurance company can legitimately refuse to pay after investors’ money is lost and claims are lodged.

“I have articulated publicly my personal view that the best way to provide additional protection for investors is through a proportionate investor compensation scheme.”

Advocate Blakeley agreed that the Government needed to step up.

"The limitations and problems with professional indemnity insurance are well known within the industry and beyond. Those problems highlight the requirement for a compensation scheme which is massively overdue.

"There is no point lamenting the losses suffered by investors when everyone knows their misery could have been remedied by a suitable compensation scheme. What is perplexing is why the States have still not done anything about it.

“The Law Society of Jersey has an industry fund scheme to which members must contribute and which may be used if clients suffer financial loss which is not covered by a law firm’s insurance and of course there is a scheme providing protection for investors who have money deposited in high street banks.

 “While regulated financial services in Jersey are required to have ‘adequate’ insurance in place, the reality is that a business can fulfil the requirement and legitimately consider the insurance adequate and appropriate but in fact it is not. The whole system of insurance needs urgent scrutiny and review.

“It needed it 2007 when the Royal Court highlighted the shortcomings and it still needs it 13 years later. If there is something the JFSC can do going forward, it is to radically overhaul insurance requirements." 

Lumiere - what went wrong

The JFSC first began investigating Lumiere in June 2016 after an on-site visit identified a number of major concerns about how the company was conducting business. The investigation was put on hold from October 2016 while the criminal investigation and subsequent trial of Christopher Byrne were concluded.

Pictured: Lumiere had prominent offices at Castle Quay.

After Byrne was sent to prison, his home was sold off by the Viscount’s Office to recoup some of the losses.

Among other findings, the recently completed JFSC investigation concluded that Lumiere had routinely failed to consider its clients’ capacity to suffer financial loss and didn’t recognise, explore or resolve anomalies when assessing its clients’ appetite for investment risk. In short, it gave bad advice to clients.

It also failed to properly assess the fund, it gave the JFSC false and misleading information, it didn’t have adequate insurance, and it failed to identify or address several conflicts of interest, not least its close relationship to the fraudulent fund. 

Announcing the findings of the investigation, Mr Moloney said: “The risk of fraudsters is constantly out there. I am very conscious that when they use a regulated business to defraud investors and deceive the regulator, by the time we catch them, investors’ money can be long gone. We need to be cautious; investors need to be cautious.

“As we would do after any case of this magnitude, our next step is to see if there is anything we could have done better. We are doing this as part of a wider update of all our processes for granting licences to businesses.”

Pictured top: Lumiere Managing Director Christopher Byrne was jailed in 2018 for seven years by the Royal Court.