M&G sues Royal London over client exposure to ‘inappropriately risky investments’

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Asset manager M&G is suing Royal London over its purchase of mutual financial advisory platform, claiming some client pension money was invested in “inappropriately risky” products before the deal and it is now under pressure from regulators to compensate.

M&G has agreed to buy Ascentric in 2020An asset management platform for advisers with £15.5bn of assets under administration, as part of an effort to increase its share of the retail savings market.

But in a lawsuit filed at London’s High Court, M&G claimed that before the deal, the business – also known as Investment Funds Direct Limited (IFDL) – “exposed its customers to inappropriately risky investments, with an inappropriately high percentage of them being pension funds in those investments”.

M&G is demanding at least £27mn in damages from Mutual and interest, alleging that Royal London failed to properly disclose risks during the acquisition process.

In court documents, M&G says that prior to the acquisition, the business made products known as CFP bonds available on its platform. Some advisers have allocated client funds in self-invested personal pensions to these bonds.

CFB bonds with a face value of about 27 million pounds were bought by 553 investors, according to the lawsuit, which was filed last month but not previously reported.

M&G claimed in its lawsuit that there was “no liquid market” for the bonds “outside IFDL’s own platform” and that some customers complained they were unable to sell them. It said they met the definition of “minibonds,” risky investments that typically offer high returns and draw scrutiny from regulators.

A customer with £304,000 of his pension invested in bonds complained to IFDL about why it allowed the product to be available on the platform, according to court documents.

Others have complained to the Financial Ombudsman Service and the Pensions Ombudsman

In a decision in March, citing the case, the FOS said that “if it [Ascentric] Due diligence in accordance with good industry practice would have led to the conclusion that the CFB bonds were a non-standard and speculative investment”.

One fund manager in particular planned to use the platform to “invest at least 30 percent of each client’s model portfolio in bonds, regardless of portfolio type or risk level,” meaning “there was a serious risk of consumer harm.”

Royal London has yet to file a defense in court. Both companies declined to comment on ongoing legal proceedings.

In court filings, the M&G added: “IFDL actively engages with the FCA [Financial Conduct Authority]And under pressure to set up a redress scheme for all IFDL investors in non-standard assets (including CFB bonds) and compensate customers.

“In the absence of active engagement with the FCA, there is a significant risk of formal FCA action being taken.”

M&G said in its half-year results in September that it plans to exit the advisory digital platform market as part of plans to “focus and rationalize our asset strategy”.