A Case Study in Risky Investments: Harlequin Properties
The Harlequin Property Story
Harlequin Property was one of the UK’s leading overseas property investment firms. Endorsed by celebrities, they offered incredible investment opportunities, manly based in South America and the Caribbean. Though the company was unregulated, they attracted many investors with their ‘too good to be true’ deals on luxury properties in beautiful locations. The company became the centre of a scandal, after reports in the national media revealed that investors had stopped receiving income payments and several of the proposed developments that should be nearing completion had not even been started. The Serious Fraud Office launched an investigation and around 9000 investors made claims against the company, having been left substantially out-of-pocket. However, further problems arose when it was discovered that the only contracts that existed were between investors and the overseas development companies, so Harlequin had not signed any formal contract with the investors. It remains to be seen if any of the claims will be successful.
How to Avoid Risky Investments
One of the major issues at the root of the problem was that Harlequin Property was an unregulated company. Many forms of overseas property investment are not regulated by the Financial Services Authority (FSA), as are other investments, such as ISAs and pensions. This means that when things go wrong, there is no governing body for these investors to turn to. It also means that there is no agreed set of standards with which companies offering these investments must comply, so there is nothing to say that they must be party to a contract or abide by any specific terms. Unregulated investments are therefore high-risk investments. They should not be entered into lightly by inexperienced investors.
If you are thinking of making an investment with an unregulated company, you should first seek professional advice from an independent financial advisor (IFA) whose practice is regulated by the FSA. Independent financial advisors are experts in investment and will be able to give informed advice regarding the level of risk an investment involves. More importantly, they are regulated by the FSA. This means that they are accountable and investors have recourse to a higher power, should things go wrong. In other words, if you invest based on the advice you receive form an IFA and it turns out that this advice was flawed, you can make a complaint to the IFA themselves, or to a regulating body such as the FSA or the Financial Ombudsman. Regulated independent advisors are required to have suitable indemnity insurance in place to protect them against such claims. This means that if you lose money due to receiving bad advice, it will be able to be recouped through the financial advisor’s insurance.
When investing in property in the UK, most investors would not dream of parting with any money until proper due diligence has been undertaken with regard to the property and any company involved in the sale. Due diligence is the act of carrying out research to ensure that a property will be a sound investment. This includes the procurement of surveys, searches, valuation reports, environmental reports, plans, title deeds and any other document containing information about the property. Enquiries are submitted to the party selling the property and all the documents are examined in detail. Further to this, all the companies that an investor chooses to deal with will generally be checked out before their services are engaged Investors will obtain quotes, look up testimonials from previous clients, ask people they know if they have experience with the company and even attend meetings with the staff before deciding to use the services the company provides.
However, due diligence all too often goes out the window when it comes to overseas property. It is more difficult to visit the property and see for yourself whether it looks like a good site. This, however, is really a crucial step in evaluating the potential of an investment opportunity. Investors should do everything they can to see a property or the site on which a development is planned before agreeing to invest any funds. Location can make or break investments, so even if the development has not yet begun, a visit to the site can give the investor a good idea of the chances of success. This allows them to see what local amenities and attractions are available. Another excuse for limited due diligence is the difficulty of dealing with foreign companies. The language barrier and different policies and procedures can often be confusing and lead to investor agreeing to overlook things that they ordinarily would not. Not carrying out thorough due diligence is the biggest cause of costly mistakes. If anything, it is even more important to ensure this is done on overseas, unregulated investments and the companies offering them.
Don’t Fall For False Promises
The deals offered by Harlequin Property looked too good to be true. In fact, they were. Avoiding deals of this sort is the golden rule of property investment. It’s rare that you get something for nothing and chances are if a company tells you that it’s possible, they are probably trying to sell you nothing for something. The easiest way to spot a scam is to listen to your gut instinct. If it sounds like an impossible dream come true, don’t let yourself be fooled. There is no gold at the end of the rainbow. The gold goes to those who keep their heads, do due diligence and base their investments on solid logic and fact.