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 the mutual’s financial adviser platform, claiming that some client pension money had been invested in “inappropriately risky” products before the deal and that it was now under pressure from regulators to pay compensation.

M&G agreed in 2020 to buy Ascentric, a wealth management platform for advisers with £15.5bn of assets under administration, as part of a push at the time to increase its share of the retail savings market.

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

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

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

CFB Bonds with a face value of about £27mn were purchased by 553 investors, according to the lawsuit, which was filed last month but has not been previously reported.

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

One customer who had £304,000 of their pension invested in the bonds complained to IFDL about why it had allowed the product to be available on the platform, according to the court documents.

Others made complaints to the Financial Ombudsman Service and the Pensions Ombudsman.

In a decision in March, cited by the lawsuit, the FOS said that “if it [Ascentric] had carried out due diligence in accordance with good industry practice it would have concluded 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 per cent of every client’s model portfolio in the bonds, regardless of the type or risk level of the portfolio”, which “meant there was a serious risk of consumer detriment”.

Royal London has yet to file a defence with the court. Both companies declined to comment on the ongoing legal proceedings.

In the court filing, M&G added: “IFDL has proactively engaged with the FCA [Financial Conduct Authority], and has come under pressure to set up a remediation scheme for all IFDL investors in non-standard assets (including the CFB Bonds) and to compensate customers.

“In the absence of proactive 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 was planning to exit the adviser digital platform market as part of a plan to “focus and rationalise our wealth strategy”.