SEB Estonia compensates clients over fund devaluation

  • 2008-11-05
  • By Matt Withers

COMPENSATION: SEB's Estonian branch said that it would cover losses incurred by investors following the surprise devaluation of one of its most stable liquidity funds.

TALLINN - Following an exodus of unsatisfied customers, SEB Estonia has announced that clients would be fully compensated for losses incurred by the devaluation of liquidity fund units.
The bank's announcement, made on Oct. 30, was likely impelled by fierce client objection to the 13.05 percent devaluation made three days earlier. The outrage has been centered on the claim that SEB billed the fund as being 'risk-free,' a statement clearly not reflected by the bank's negative reassessment of the fund and the subsequent loss of almost 200 million kroons (12.7 million euros).

According to the Estonian newspaper Postimees, the markdown 's largely attributed to the purchase of Icelandic bonds 's prompted customers to withdraw an estimated 400 million kroons (25.5 million euros) from the liquidity fund. This undoubtedly sent SEB into a panic given the banking industry's current struggle to secure investments.

Among the most vocal of critics had been Heldur Meerits, chairman of the Estonian Investor Association, who claimed that SEB had deliberately deceived its customers.
"What happened was clearly different [than] what SEB had promised about its fund. Something has gone very wrong in the fund management in assessing risks," said Meerits.
The bank's official stance on the incident is that a post-devaluation assessment revealed there were inconsistencies between the fund's stated risk-level and the actual risk, consequently instigating compensation.

"After this revalue of the liquidity fund 's which was correct because our fund must always reflect the true value of the assets 's SEB did an assessment which showed that we have miscommunicated the risk level of the fund," Silver Vohu, head of communications at SEB Estonia, told The Baltic Times.
"In several cases we have described the fund as a risk-free investment, and that was not the case. So therefore we took the responsibility and said that we would compensate the clients," he said.
Yet the good-will stance purported by SEB is somewhat undermined by previous statements made by the bank's liquidity fund manager Ene Ounamaa, who claimed that customers had overestimated the fund's risk tolerance.

"Clients have to understand what their risk tolerance is, but [they] unfortunately often overestimate. Actually the real risk tolerance can be found together with a professional advisor or by filling out a questionnaire on SEB homepage," Ounamaa said in the fund's last client release.
SEB's apparent u-turn over the fund's risk tolerance may not have taken place over loss of customers alone 's the Estonian Financial Supervision Authority also deemed clients eligible to take legal action if they had disagreements with SEB Varahaldus, the bank's asset management subsidiary.

Further controversy plagued the devaluation when the Estonian Financial Supervision Inspectorate launched an investigation into whether information was leaked prior to the markdown. Suspicions were aroused when 200 million kroons (12.7 million euros) were withdrawn from the fund immediately before the changes were enforced.

In order to defuse the situation and nullify any benefit gained by the large pre-devaluation withdrawal, SEB has ensured that the compensation will encompass those clients who sold their liquidity fund units at the reduced rate post-devaluation. 
SEB's liquidity fund has 3,161 unit holders and 1.3 billion kroons in combined assets, 49 percent of which are cash and short-term deposits.