Preference shares are shares in a company which give their holders an entitlement to a fixed dividend but do not usually carry voting rights. They have made the headlines recently because of the number of clients complaining about the way in which they have been mis-sold. Those who acquired these shares, later realised that they were not the conservative fixed income that they thought they were originally.
This product was launched on the market to individual investors who did not have the experience or qualifications to understand them. They were given the impression that they were a fixed income product and did not have the level of risk attached that they did in fact carry. Investors were missing the information they needed at the point of sale and when they contracted.
In 2007 there came into being legislation which regulated the supply of these products. It is known as MIFID legislation and imposes on banks certain obligations to make the purchase transparent and includes the client supplying information about their own level of expertise and knowledge. Have they sufficient to be able to understand the product they are contracting? Before this legislation purchasers of preference shares were only protected by the general consumer laws and some other stock market and banking legislation.
Although this additional legislation was aimed at protecting clients, in reality this often did not happen. It has come to light through the courts that in many cases the banks provided information verbally and that the contracts included only the minimum of explanation. Many of the purchasers of these products did not have the fixed income products they believed them to be.
Instead they had purchased products that:
- Involve a level of risk that they did not anticipate
- Are dependent on the profitability of the company – a feature that often now means that there is no interest accrued
- Do not enable the investor to recover the capital invested, at least until a distant point in the future, for example the year 3,000 – making it virtually unrecoverable
- Were not covered in case of the bankruptcy of the company by the Deposit Guarantee Fund
Investors who are finding themselves in this situation are left with either appealing to the courts to try to obtain a return on their investments or trying to sell the product. Resorting to the courts can be a lengthy process and if the investor does try to sell the product they are unlikely to get a good price. In some cases companies have gone to arbitration with clients in order to try to reach a solution but this has not been achieved in many cases.
The underlying difficulty is the conflict of interests that exists when the seller of the product is also the one required to supply the information. In our view, what is needed is greater regulation and more power to intervene.
This situation could have been avoided, or at least improved, with the greater involvement of the public authorities. A demand currently being made by consumer associations.
What you can do
If you believe you have been mis-sold a product like a preference share you can get in touch with our legal department who will check the situation for you.