AIG FAQ

Frequently asked questions about AIG and the banks and financial advisers

The mis-selling of investment bonds invested in AIG's Enhanced Fund is the latest mis-selling scandal. Typically such an investment was made on the advice of a bank official or a financial adviser.

A significant number of investors in these bonds should not have been in any investment bond at all, however secure. Many of those who were advised to invest in the AIG Enhanced Fund, did so under a misapprehension as to the nature and security of their investment.  

A number of frequently asked questions are appearing on various websites and during discussions with clients. Clarke Willmott offers the following answers to these, having spoken to a number of AIG victims and read their files.

The basis for my claim - should I claim against AIG or my adviser?

We have seen nothing at this stage which suggests that the principal claim is against AIG. Even if the product literature was misleading, this product was, we believe universally sold via intermediaries. So the element of reliance on the product literature will be difficult. Indeed on many occasions the product literature will not have been passed on fully or even at all or it will have been "interpreted" inaccurately or inadequately in the intermediary's advice.

On the other hand the intermediaries should have been clear there was always a risk that firstly investments in the Enhanced Fund would not be instantly accessible and secondly that there were precarious elements to the underlying investments.

Claims should therefore focus on the advice which was given to invest in this structured product.

The rules imposed by the FSA on advisors for advice on structured products (called packaged products) are set out in the FSA's Handbook. The FSA's website gives direct access to the Handbook and you can set the text to the particular time of your transaction. By and large, if the risk was not properly explained, or if a product was not suitable for your requirements, you should have a claim.

Further, one client's IFA has advised us that an investment bond is an unsuitable investment for anyone with a short term investment need, or who is, and is likely to remain, a higher rate taxpayer. It is, we are advised, untrue that there is any tax advantage in such an investment for such a client. We have discussed this with other IFAs; some have agreed. This is a matter to be explored with experts in due course

Aren't AIG guaranteed by the Financial Services Compensation Scheme?

Yes, but the AIG Enhanced Fund was not. The FSCS only provides protection in the event of the insurer failing not the fund. Now that that AIG has guaranteed returns from the Maturity Plan, the result is also guaranteed as to 90% (approx) by the FSCS. There was no such guarantee before if your investment was not in a guaranteed fund.

How strong is my claim?

Assuming you don't have a limitation problem, this will depend on exactly what the intermediary said, what your needs were, and why it recommended the AIG Enhanced Fund. All the files we have looked at reveal well documented but totally inappropriate recommendations. The cases are strong, in our view. If you knew exactly what this fund was then your position is more difficult but the investment still had to be suitable for your needs and it may not have been. However, to date, we have not seen an example of the fund being accurately and properly explained to an investor.

How are my losses measured?

In a financial advice case they are measured as the capital difference at the date of crystallisation between the position the investor is actually in and the position the investor would have been in had correct advice been given and followed.

Most of the comment we have heard suggests that the AIG Enhanced Fund was sold as a substitute for cash on deposit, so the difference will be the amount which would have been earned on deposit, plus the capital, less what is actually received.

In the case of future estimated loss (such as where a roll over until 2012 has been selected), it will be a case of proving what will probably occur following that choice. The court will make an educated estimate of what is likely to be received, discount it back to the date of calculation and subtract that from the likely receipt from the alternative investment. More complicated calculations will be needed if the alternative was not a deposit account.   

In the courts, losses are usually the subject of independent expert evidence and, if not agreed, are decided by the judge. The Financial Ombudsman Service (FOS) often takes the approach of inviting the losing party to calculate the damages that it has to pay which can result in significant further disputes and at times court proceedings over the implementation of the decision.

I rolled over. I now have a guaranteed return. What are my losses?

You can take the guaranteed return as the starting point for your probable outcome in 2012, in the absence of expert evidence credibly predicting a better result. Your damages thus are the difference between your current financial position (i.e the amounts received together with the likely receipts in the future under the Maturity Plan) compared to the position in which you would have been with non-negligent advice. With non-negligent advice, you would almost certainly have still had your capital sum plus interest from the date of investment.

Instead, you have lost access to 50% of your funds and will suffer a loss of future interest, a loss of access and a loss of security as to the return of the capital. The amount likely to be received under the Maturity Plan will need to be the subject of expert evidence. It seems to us that the best outcome is likely to be the underpinned value in July 2012.

Our understanding is that the worst is the FSCS guarantee of 90% of that sum. Upon the basis of the best likely outcome and assuming an investment return of say 4.5% per annum compound to 2012, for each £100,000 (guaranteed value) of fund, there is likely to be a loss of about £17,500 by 2012. That loss is then discounted back to the settlement date at an appropriate rate of interest.

Should I make my claim through the FOS or the Courts?

When advising a new client with a financial services claim, we usually offer them the following brief comparison of the relevant merits of the Financial Ombudsman Service and the courts.

In addition to the foregoing you should be aware that:-

a)  The courts will entertain a group claim whereas the Financial Ombudsman Service will not - albeit it may use a lead case procedure of which we comment further below. So, if particular customers of a particular bank group together and run a claim as a joint enterprise (on which also we comment further below) they will have to use the courts; and

b) The FOS has been the subject of severe criticism for the way it handled the claims of Equitable policyholders. On this see the report of Lord Neill of Bladen QC, the former Chairman of the Committee Standards in Public Life, provided for the Equitable Life Members' Action Group ("EMAG") given in evidence to the European Parliament - http://www.europarl.europa.eu/comparl/tempcom/equi/written_evidence/20070130_neill_summary_en.pdf. FOS controversially and fatally for many complainants' claims decided that it was not an appropriate forum to adjudicate on claims based on Equitable's finances and as a result dismissed en masse claims based on Equitable's financial weakness.

Can you claim in two places at the same time?

The short answer is "no". There is a longer answer, but assume you have to make a choice. You can claim in the FOS, then reject the finding if you don't like it and sue. But you must beware of the expense and wear and tear of fighting the same battle twice, and the danger posed by the limitation period expiring whilst the matter is being considered by FOS. In such circumstances, you will not be able to subsequently sue if FOS has rejected the complaint or made an inadequate award.

We have heard some policyholders believe it is desirable to go to the FOS first to mitigate the risk of adverse costs when you sue later. There is no basis for this. If a FOS decision is rejected, it will not be binding on any later proceedings or indeed prevent a defendant from raising the same arguments with a potentially different result in the courts. As summarised above, the procedure is different so you can get different results.

What does "limitation" mean?

Claims do not last forever, you have basically 6 years from the date of the negligent advice in which to start a claim with the courts, or 3 years from when you first reasonably should have realised there might be something amiss; FOS applies slightly different time limits. The court time-limit is for the issue of proceedings not writing to the other side or engaging solicitors.

I have chosen the maturity plan. Why not wait until 2012 before making a claim

If you have rolled over into the Protected Recovery Fund, and hold your investments in that until maturity in 2012, you will indeed not know for certain what you return will have been, and therefore what your loss will have been, until then.

However, you will be able to calculate losses on a balance of probabilities and the legal issue is that your claim only lasts 6 years from the date the cause of action arose, which is generally taken as the date you invested. It might be some later date, such as a date when your adviser ought to have told you to get out, but it's desirable to pursue any action within the first period.

Always remember that your loss as against your adviser occurred (in most cases) when you followed his advice to invest, not when you draw the money out. So, if you are a recent investor, you might be within time leaving a claim until 2012. If not, you cannot wait. It is, however, undesirable to leave it to the last minute. By 2012 the evidence will not be fresh, and psychologically you may find it difficult to summon the mental resources to bring a claim. In addition, the necessary lines of enquiry such as obtaining papers and witness statements are likely to be more difficult.

Legal Costs are frightening. Can I afford to do anything?

Many policyholders will have legal expenses insurance as a bolt-on to their domestic insurance policies. These should be looked at immediately. If there is a policy, you should submit a claim on it now. If it is left the insurer may be able to avoid the claim.

However, you will need to check on restrictions in respect of the types of dispute covered and the financial limits of the cover provided. Because of financial limits, legal expenses cover may need to be "geared" by the use of a conditional fee agreement in addition and/or separately purchased top-up adverse costs cover to ensure that all of the potential costs consequences are covered. Otherwise, the limit of cover can be easily exhausted by solicitors who only act under "pay as you go" retainers.

Some solicitors will offer conditional fee agreements. We like to do so in suitable cases. The reason for this is that the solicitors' costs plus a success fee are likely to be recoverable on successful conclusion from the other side. This can be done without a detriment to the client if the agreement is written properly and  the client has the advantage of only  paying the solicitors' costs at the end out of what is recovered, and not at all if the case is lost. In other words, we will share the risk with the client where the case has good prospects and in our view, should be pursued.

Can I get together with others to start a class action?

There is no reason in principle why the customers of a particular bank or intermediary should not band together and run their claims as a joint enterprise. Costs can be saved as a result - for instance by sharing experts' fees - and the solicitor can set a tariff to produce a fighting fund to cover such payments. Further, lay clients often feel more comfortable in a group rather than facing what they see as a big institution on their own.  There are likely to be sufficient common features between the customers of the same intermediary to make such an approach workable.

This can be done as a managed group rather than a true class action thereby allowing more individual choice for each client including in respect of settlement.

In contrast, in a true class action run as one claim, the individual features of each investor's case will be overlooked as the claim will concentrate only on the features common to all the claims. Furthermore, this will have an effect on the level of settlement. Authority to run the case and settle it will need to be delegated. Managing group litigation can be difficult. It is important (in our view) that it should not be lawyer led, but should be led by the clients. A steering group with delegated authority to make decisions on behalf of the group is a very important prerequisite in our view.

If a large number of claims are put to the FOS it is likely to select lead cases and then decide all other cases on the basis of those lead cases. This was the process adopted by FOS in claims brought against the failed life assurer Equitable Life.  It can cause delays. We know of some individuals who still await resolution of their cases despite the fact that they were put to FOS over 4 years ago.  FOS can be enormously slow.  You have no control over the FOS's selection of lead cases and again, to our personal knowledge, FOS may present those lead cases to the public in a misleading way.

We have a clear strategy for AIG claims, and an experienced team to handle them. If you would like to know more, please contact Robert Morfee, Paul Chapman or Jon Green