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Wine industry bid to regulate investment

11 December 2012Written by Ivan Macquisten

The failure of wine investment funds to the tune of around £100m in the past four years has prompted the industry to set up a regulatory body to police such ventures.

The Wine Investment Association (WIA), which hopes to revive confidence in the sector as an alternative asset base, has just launched a consultation exercise setting out a list of aims that range from safeguarding the public against fraud, malpractice and misrepresentation to promoting unity and understanding among wine investment businesses.

It intends to have a new code of practice in force by February 14, 2013.

The association is aimed at what are seen as higher-risk businesses with a turnover of less than £20m a year. Members will have to sign up to a code of practice and undergo an initial compliance audit to prove their competence and that they have the necessary processes in place. Thereafter, they will have to submit to similar audits on an annual basis as well as supplementary audits in the event of complaints against them.

Mazars LLP have been engaged as auditors.

"The Compliance Audit will not include the financial affairs of the member - which are covered variously under current UK legislation," advises the consultation briefing.

Breaches of the code may result in a range of sanctions, from a caution to expulsion from the association with the punishment being publicised via the association's website.

Wine held in bond tops the list of areas of concern. The draft code proposes that members should only be allowed to accept orders for wine they already hold in stock or for which they can show "a valid contract for future purchase", covering en primeur and other deals.

Client Accounts

Separate client accounts are also deemed essential. Designated as Customer Storage Accounts, these will clearly delineate stock owned by clients from that owned by the company where wines are held in storage on the clients' behalf. This addresses the problem of client property being absorbed as company assets in the event of a firm's failure or liquidation.

 "Furthermore the member shall implement processes which ensure that title to any customer's wine(s) in its custody passes to that Customer as soon as practicable," states the draft code.

Members will also be held responsible for clients' wines while in transit under their control.

Financial Services Authority rules currently do not cover most investment advice related to wine, which means that investors have no recourse to compensation under those rules.

Companies that are not regulated by the FSA cannot give investment advice on regulated or controlled products. Now the WIA intends to strengthen controls by demanding under its code that members clearly display the association's standard disclaimer together with an investment risk warning, on its website and on all promotional material, whether in electronic or hard copy form.

Members will also be banned from advising, suggesting or otherwise encouraging customers or potential customers to dispose of any regulated product in order to invest in wine.

And they will also be banned from publishing any statement or advice concerning the tax status of wine collections and/or wine disposals, "except where the statement or advice has already been published by a relevant regulatory or statutory body, such as HM Revenue & Customs".

Investment advice must include details of past performance of the stock in question as well as clear information on commissions and other costs linked to storage and delivery. Those commissions must appear on all invoices and members must also notify customers promptly of any change in condition that might have an effect on the value of their purchase.

"Chronic mismanagement"

The code also covers issues such as cold calling, marketing practices and selling techniques, as well as introducing cooling-off periods for purchasers and details of best practice.

"Chronic mismanagement within sectors of the wine industry has left innumerable, helpless creditors out of pocket," says the WIA.

"Many have invested large parts of their life savings into the industry, with in some cases amounts between £50,000 and £180,000, having been convinced of the promising returns in a time of underperforming stocks and low interest rates. But, since 2008, over 50 wine investment companies have been thrown into liquidation after reports from creditors' meetings exposed the extent of financial mismanagement.

"Records were found to be in such disarray that the companies were unable to even identify the exact source of their deficiency. It has been revealed that struggling creditors may only receive a heartbreakingly meagre 15-20p for every £1 they invested."

 All this has put tackling the issue at the top of the agenda, and the consultation documents stress the need for investigations and measures to resolve disputes to be prompt and effective.

"A crucial element of the Association Charter is to form an Independent Panel to rigorously oversee the compliance of the Charter without favour to its members," they say.

The key documentation is available at www.wineinvestmentassociation.org, with a closing date for comments of Friday, January 18.

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Written by

Ivan Macquisten

Tags

Wine

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