Structured products provider Merchant Capital has ceased to exist following a year of uncertainty after its umbrella company, Merchant House Group (MHG), got into financial problems.
The head of structured products at Merchant Capital, John Gracey, told SRP it was sad to see the business go and confirmed that redundancy letters were sent last week to the 20-strong team encompassing staff in sales, marketing, product development, administration and compliance. He declined to comment further.
SRP has learnt that Gracey and the director of operations, Tony King, resigned in mid-December when it became obvious that the continued existence of MHG's structured products arm was untenable.
"There were issues of staff not being paid for a month, and the directors lost confidence in the board of MHG when they were told investment was coming in and it never did," said a source.
Despite reassurances from its directors, according to the source, MHG underestimated the difficulties of acquiring a major IFA business and the resources needed ended up draining the business. The shares of the company were suspended because of the lack of capital in March 2012.
But the final straw, said the source, was the collapse of Pritchard Stockbrokers, the custodian for clients' money at Merchant Capital, at the beginning of 2012. "Despite moving the plans to Reyker Securities, the bankruptcy of the custodian was a major blow to the business and the perception from clients changed."
Although assets invested in Merchant Capital's products were segregated and transferred to Reyker "as a matter of urgency", clients were nervous about the custodian situation, the firm was unable to do business for some time and it ran out of income to continue in the market.
"The move to Reyker showed the business had alternatives and investors' money was ringfenced, and we could tell clients their investments were being looked after by the new custodian," said the source. "But the lack of capital to operate added too much pressure to the business."
Another source from a major provider in the UK, who also wanted to remain anonymous, told SRP that the recent failures in the market (also including SPGO and Incapital) show that the relationship of custodians and administrators with providers of structured products is key.
"This brings us back to the risks of administration," he said. "Pritchard has showed that if things go wrong at that level, there are consequences despite being a separate entity from the provider."
SRP understands that the last two plans marketed by Merchant (FTSE Select - Defensive Kick Out and FTSE Select - Quarterly Income), both hedged by Royal Bank of Scotland (RBS), sold over £5m and all the sales to IFAs were executed despite concerns about the money raised having to be returned as Reyker was able to renegotiate the terms. Reyker did not return calls by press time.
Merchant Capital was built on the back of the acquisition of Arc Capital & Income (ACI) in 2009 after the business had to be restructured, and Keydata's structured products book in 2010, another failed structured products distributor. ACI's and Keydata's structured products books provided the Merchant with access to large UK advisers' networks including Tenet and Sesame.