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ombudsman news

issue 11

November 2001

fund management complaints

The new FSA rules require any expression of dissatisfaction about performance management issues to be dealt with as a complaint. In view of this, some firms have asked how the new rules will affect the way we treat fund management complaints. There has been concern that such cases would have to be reported to the FSA and complainants given referral rights to the Financial Ombudsman Service, thus raising an expectation that we can investigate complaints which, in fact, are likely to be outside our jurisdiction.

This concern also arose in relation to complaints made to our predecessor ombudsman schemes. The position remains that straightforward complaints about investment performance are outside our jurisdiction. Further, the procedural requirements of the new rules - that firms must provide the consumer with rights of referral to the ombudsman service - do not apply when a "complaint" can be resolved by close of business the next day. In many cases, firms should be able to deal fairly easily with a client's expression of concern purely about investment performance using, no doubt, a standard reply.

Some firms claim they have no discretion to exercise their judgement about how to handle an "expression of concern" from a customer where it may not be appropriate to use the complaints procedures. However, the rules were drafted in a way that gives firms as much discretion as possible.

A firm must have appropriate and effective complaints-handling procedures, but the "scene setting" Rule (DISP 1.2.1) refers to "expression of dissatisfaction........about that firm's provision of, or failure to provide, a financial services activity". It is a matter of judgement as to whether clients' concerns about investment performance fall within that definition.

Clearly, in situations where there is no doubt about the basis of the complaint and no question of the matter being one that falls within our jurisdiction, providing referral rights would only raise customers' expectations unnecessarily.

However, many "performance complaints" include other elements - such as the suitability or otherwise of an investment or allegations of negligent advice. Firms should take care to consider whether the wording a complainant uses to express concern over investment performance is actually an expression of dissatisfaction with the suitability of the investment.

Furthermore, complaints that may appear to be simply about investment performance are likely to be within our jurisdiction if they arise as a result of concerns being raised about charges:

  • not being properly explained;
  • being applied at a higher level than permitted under the contract;
  • being unusual and/or onerous;
  • representing a penalty;
  • being unfair; or
  • being so high that the policy cannot perform as required.

It is not in anyone's interest for consumers to be referred to us when their complaints are not within our jurisdiction. However, the FSA rules require firms to ensure investors are not prevented from having their complaints dealt with properly when those complaints are not purely about performance. We should all be guided by the FSA's overall objective that firms should treat their customers fairly, in accordance with the Principles for Business.

The following case studies demonstrate how we judge whether complaints about investment performance fall within our jurisdiction - and how difficult it can be to make that judgement.

case studies - performance complaints

11/06

Mr T claimed he was promised a high rate of return on his portfolio, which included a PEP investment, and which was transferred to a regulated firm as fund manager. However, the portfolio's performance fund fell substantially below his expectations.

It was appropriate to treat the matter as a formal complaint. This was because the substance of Mr T's dissatisfaction was not simply that his investment had not performed as well as he had hoped; he believed he had been promised a certain level of performance.

However, our investigation revealed no evidence that Mr T had been given any promise about the rate of return he could expect, so we did not uphold his complaint.

11/07

Mr L was concerned about the poor performance of his investment bond, which he had been given to understand would be linked to the FTSE 100 Index.

The product literature explained how the investment return on the bond was determined by reference to the percentage of the rise or fall declared in each quarter on the FTSE100 Index. The literature also stated that on each fixed quarter date, the firm would declare the proportion of the growth in the FTSE100 Index for the next quarter. However, Mr L's adviser had told him that the full rise in the FTSE100 Index would be added to the value of the bond. We took the view that the adviser had not explained the workings of the contract adequately.

It was clear, therefore, that although the investment returns had been correctly calculated, they fell short of what Mr L had been led to believe he would receive. The firm agreed to our proposal that it should return Mr L's original investment, together with interest calculated at our normal rates.

11/08

Ms J transferred a total of £163,000 in funds and assets for discretionary portfolio management. Most of the transfer took place in 1994, although £8,750 of the total was transferred in March 1996. Her funds and assets were invested in two portfolios: an investment trust growth and income portfolio (the "income" portfolio), and a unit trust capital growth portfolio (the "capital growth" portfolio).

By August 1999, the combined value of the two portfolios was £177,000. Ms J complained to the firm that the funds had not increased sufficiently in value. She also complained of over-weighting towards Far Eastern markets. She claimed minimum compensation of £26,863 - a figure she arrived at by assuming the funds invested achieved a rate of return of 6% per annum.

After we became involved, the firm made an open offer of settlement on the basis that the capital growth portfolio was not suitable for Ms J's needs. It offered to refund fees amounting to £9,000 on the capital growth portfolio and to pay compensation for the fall in value, then amounting to £548. When Ms J protested that the degree of risk had been explicit, and that she wanted low-risk investments, the firm offered to refund the fees charged on the income portfolio as well. Ms J accepted the revised offer of £16,296.

11/09

Mr O complained about poor performance and alleged mismanagement. He had entered into a discretionary investment management agreement with a firm in January 2000. The firm began managing his £50,000 fund with the stated goal of improving on the 2.9% return that the money had been earning before then.

It was not until Mr O returned from abroad, in August 2000, that he was able to review the contract notes and other information the firm had sent him. He discovered there had been a significant fall in the value of his investment. He contacted the firm immediately to discuss his concerns, especially the inclusion of speculative stocks and shares.

The firm decided that, while it was investigating the matter, it would lower Mr O's risk profile and invest in some managed funds. However, the investment continued to fall in value.

The firm accepted that there had been a misunderstanding from the outset about Mr O's risk profile and that it had not known he regarded the fund as a "pension fund/nest egg". We upheld Mr O's complaint. We took the view that the firm had failed to keep sufficient written records and had not taken reasonable steps to enable Mr O to understand the nature of the risks involved. We considered the firm had been negligent and had not adopted an investment strategy which properly reflected their client's intentions. We required the firm to compensate Mr O for financial loss and for the distress and inconvenience that he had suffered.

11/10

Mr and Mrs A both held single-company PEPs from the same product provider. The value of Mrs A's PEP had consistently fallen since the date of her investment. Her husband's PEP was invested in a different company and although initially the shares had almost trebled in value, they had since fallen again.

The couple complained that no "stop loss" system appeared to have operated on Mrs A's PEP and that the profit was not taken on Mr A's PEP when it was available. They stressed that their complaint did not relate to investment performance as such, but to "profit not realised through indifferent and negligent management". They also claimed that the PEPs had not been reviewed regularly, despite promises in the product literature. The documentation the couple had received made it clear that:

  • the objective was long-term total investment return; and
  • single company PEPs carry a higher risk than investment in a product where the money is spread across a range of shares.

The firm responded to the complaint by explaining that since single-company PEPs are a longer-term investment, it did not consider that active management - of the sort that Mr and Mrs W appeared to expect - was appropriate: the costs incurred with each sale and purchase could negate any gains made.

The firm believed that the shares in its single-company PEPs had the potential to deliver long-term returns and it had not seen any need to make changes. It noted that it reviewed the holdings in the single-company PEPs with the same frequency and on the same basis as any other holding in its main UK portfolio.

Not every investment manager would agree with the firm's decision to hold on to the existing shares. However, we did not believe this could be construed as a failure to exercise reasonable care. There are many different ways of managing investments but the one thing they have in common is that there is no guarantee of success. We did not uphold the complaint.

11/11

In January 2001, Mr C asked the firm that managed his single-company PEP to send him a valuation of his portfolio. He was "astonished and annoyed" to discover that the firm had switched out of some shares and into others and that the valuation, at £2,503.31, was £5,096 lower than it would have been if the investment had remained unchanged.

The firm had performed the switch on 26 July 2000 but it subsequently issued a statement, dated 31 July 2000, indicating that the original shares were still in the portfolio. The firm said the statement was correct at the time of printing because the deal was not settled until 2 August.

Mr C claimed that the investment switch showed a complete lack of judgement and expertise on the part of the firm. He said he had been disadvantaged by the difference between the current value of the PEP and the value it would have had if the switch had not been made. He also claimed that by failing to notify him or his adviser of the switch, the firm denied him the opportunity to monitor the change or take action.

The PEP Terms and Conditions gave the firm complete discretion to choose or switch the shares held in the PEP. The firm was under no obligation to advise Mr C immediately of any switches. Under the regulator's rules, Single Company PEP managers are not required to advise clients of any changes at the time of the switch - although they must give details in the periodic statement. There had been no breach of rules surrounding the fact that the transaction did not appear on the 31 July statement. Since there was no evidence of the firm's negligence, we did not uphold Mr C's complaint.

11/12

In May 1988, Mr P invested in a with-profits savings plan. He was disappointed with the return he received and noticed from his statements that the annual bonuses declared by the company were decreasing, compared to previous years. He concluded that the company must therefore have mis-managed his investment.

We were unable to investigate his complaint about the level of bonuses declared by the company, since this was a straightforward complaint about performance and therefore outside our jurisdiction. However, we considered the suitability of the investment and established that it met Mr P's stated requirements at the time of sale, and that the adviser had fully documented these requirements and the reasons for recommending the plan. There was no evidence that Mr P had been given any guarantees about the plan's performance. We did not uphold the complaint.

Walter Merricks, chief ombudsman

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.