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.
Mr and Mrs B complained about the mortgage endowment policy they were sold in 1991. They said the adviser had not mentioned that there was any risk of the policy not producing the sum they needed. He had told them that the policy would not only enable them to repay their mortgage in full, but also provide them with a lump sum.
The firm accepted liability since there was insufficient evidence from the time of the sale to establish whether the adviser had properly assessed the couples attitude to risk. It made them an offer in accordance with Regulatory Update 89.
Initially, the couple rejected this offer and referred the matter to us. However, after we wrote to Mr and Mrs B to confirm that the firm had calculated redress appropriately and that in our view the offer was fair and reasonable, they accepted it.
When Mr and Mrs D were sold an endowment policy in 1986, the adviser gave them a handwritten "quotation", setting out the amount they would receive when the policy matured. They complained after receiving a "re-projection" letter from the firm, telling them that the policy might not pay off their mortgage. Mr and Mrs D felt that the firm should honour the amount on the "quotation".
The "quotation" was set out on the firms headed paper, and said:
= £23,612 MIN @ 25 yrs
Mortgage = £11,000
£12,612 Cash in hand tax-free.
The figures were based on the value of similar policies that had matured in 1986, and the firm felt they did not constitute a guarantee. However, there was no evidence that the adviser had provided any disclaimers that could have brought the "quotation" into doubt.
There was also no evidence to suggest that, at the time of sale, Mr and Mrs Ds occupations, or investment experience, would have given them sufficient knowledge to question the advice they received.
The sale took place before the Financial Services Act 1986 came into force, so the sales procedure and documentation were much less detailed than they are now. This, allied to Mr and Mrs Ds lack of experience in financial matters, led us to the view that they could not reasonably have been expected to know that the information they were given was incorrect, or that the firm did not provide guarantees for this product.
We upheld the complaint. We decided that the firm should honour its "guarantee" and pay the couple at least £23,612, provided the couple maintained their payments until the policy matured.
In September 1990, Miss K was advised to take out a unit-linked endowment policy to cover her mortgage. She said she was told that the policy did not carry any risk and was guaranteed to repay her mortgage. She was a single, first-time buyer, on an average income and not in the position to take any risk with her money.
She was therefore alarmed to learn, in August last year, that the policy was not guaranteed to repay her mortgage and was forecast to produce less than she needed. This prompted her to complain about the advice she was given.
The firm upheld her complaint, as it was unable to trace any documents from the time of the sale. It offered Miss K a refund of the premiums, plus interest at the rates we recommend. Miss K decided to refer the matter to us.
Since the firm appeared to have accepted liability, we looked at whether its offer was appropriate. We found it had not followed the guidance in Regulatory Update 89 when it carried out the calculations for compensation. As a result, it had offered Miss K less than the amount she was entitled to. The firm revised its offer and Miss K accepted.
Mr and Mrs N obtained a staff mortgage through Mrs Ns employer, at a substantially discounted interest rate. Mrs N received commission on the sale. No financial advice was given to the couple, but it was a condition of the deal that employees had to take out an endowment policy with a named company.
Mr and Mrs N complained when they subsequently received a re-projection letter indicating that the policy would not produce enough to repay their mortgage.
Our adjudicators initial view was that the complaint would not succeed, as the sale had been an "execution-only" transaction (one involving no financial advice). Mr and Mrs N rejected that view, as they felt they should have been offered advice. Unlike his wife, Mr N was not an employee of the firm and he felt he was owed a duty of care.
The case was referred to the ombudsman for a final decision. He did not uphold the complaint. The sale had been properly conducted on an "execution-only" basis. Mrs N had sufficient knowledge of investments to understand the implications of investing on this basis, and there was no evidence that she had felt any need to seek advice before proceeding with the deal. She had benefited from the sale by receiving commission and both she and her husband had benefited from the discounted mortgage interest rate.
Mr Y is a stockbroker. He took out a loan against the future value of an endowment policy he had taken out several years earlier. He agreed to repay it no later than the date when the policy matured. However, he did not pay any of the interest on the loan, so by the time the policy reached maturity, the accrued interest, together with the capital amount he had borrowed, made up a very substantial sum. Mr Y claimed that, until the policy matured, he had been unaware of the amount of interest he owed.
Mr Y had taken independent financial advice some five years earlier, resulting in his making increased payments into a personal pension plan. He alleged that the adviser should, instead, have advised him to repay the outstanding loan.
There was no evidence that Mr Y had told the adviser of the existence of the loan and, from the information he gave the adviser about his personal circumstances, the advice Mr Y received appeared to have been entirely appropriate.
Mr Y confirmed that he had received annual interest notices, setting out the amount of interest due, and he admitted that he had misread them. Mr Y enjoyed considerable earnings and we were satisfied that he had sufficient disposable income to be able to pay both the outstanding interest on the loan and the pension contributions. We did not uphold the complaint.
In 1996, Mr R bought a PEP (Personal Equity Plan) through an independent financial adviser. The sale was made on an "execution-only" basis as no advice was given. Mr R subsequently discovered that German-owned. He complained of misrepresentation because the product literature did not mention this. He explained that, for personal reasons, he would not have bought the PEP if he had known of the German connection.
We did not uphold the complaint. There was no question of Mr R having been misled about the nature of the investment and in the context of its investment contract with Mr R there was no onus on the firm to disclose the nationality of the firms owners. If Mr R had special requirements, it was up to him to make sufficient enquiries to ensure that the product met his criteria.
Mr H was in dispute with the firm concerning his eligibility to receive a windfall benefit, following the firms merger with another company. To be eligible, customers had to be "members" of the firm at midnight on 26 May. Four days before that date, Mr H had asked for a transfer of his pension benefits from the personal pension policy he had with the firm. The transfer, and the termination of the policy, did not take place until after 26 May. Mr H therefore insisted that the firm had acted incorrectly in telling him he was not entitled to receive the windfall benefit. However, the firm said that Mr H had no longer been a "member" by 26 May.
We rejected the complaint. Membership rights are determined by statute, which states that membership ceases when "the benefit under a policy falls due". Mr H had sent the firm a valid, signed request for a transfer of his policy benefits and we considered that the policy benefit was "due" on the date the firm received the request. His membership therefore came to an end that day. The fact that the transfer was not actually carried out until after 26 May was irrelevant.
Mr J complained that he had been inappropriately advised to transfer his existing investments into a "drawdown" policy (a policy where the income is drawn from the investment fund, not from an annuity). He said the advice he was given had not taken into account the benefits he would forego by giving up his existing investments. These benefits included guaranteed annuity rates when he reached normal retirement age. The amount of money involved was significant.
The firm accepted that it had not discussed with him the loss of the guaranteed annuity rates. However, it suggested that Mr J had such an overriding need for the cash sum that he would have acted no differently had such a discussion taken place. It also said that it had discussed the other potential options with Mr J but that he had rejected them all, and no other alternative was available.
We did not uphold Mr Js complaint. The case turned on his individual financial circumstances, which were complex and included significant liabilities and substantial property assets. We concluded that, in these very specific and individual circumstances, the firm had recommended the "drawdown" as a last resort. We saw sufficient evidence that the firm had made Mr J aware of this, and of the disadvantages, but that this had been the only feasible option acceptable to him.
Mr G ran a small self-administered pension scheme on behalf of himself and several employees. One of the investments within that scheme was a trustee investment bond. Mr Gs complaint concerned the advice he received to "cash in" that bond in order to fund a tax-free cash sum for a member of the scheme who was retiring.
The majority of the cash that Mr G needed was available from other sources, so he only required a comparatively small additional amount. However, Mr G was advised to cash in the bond in its entirety. Approximately 15% was used to make up the amount to be paid to the employee and the rest was placed in the trustee bank account.
The firm accepted that its advice might not have been suitable but it found it difficult to quantify a loss or make an award of redress. When we looked in to the matter, it became clear that the firm could have offered an alternative solution that was far more appropriate. We established that Mr G had suffered a financial loss and we reached agreement between him and the firm about a suitable formula for calculating the amount of redress that was due.
Mrs E, an elderly lady, complained that she had been inappropriately advised to transfer her entire savings from a building society account into an offshore high-yield fund, and to take an income from the new investment.
Although the investment generated an income, the amount of capital depreciated significantly. Mrs E said that she was not in a position to take any risk with her investment and had not been warned that the capital could depreciate.
The firm suggested that Mrs E had been advised of the risk she was undertaking and there was a note to this effect on the "fact-find".
We upheld the complaint. Mrs E was not an experienced investor and had previously taken no risk with her money. The product literature provided no warnings about possible capital depreciation. Moreover, the level of income that the adviser suggested was highly likely to cause the amount of capital to fall. We also noted that, before she made this investment, the adviser had told Mrs E her building society funds were at risk of falling in value, as a result of inflation.
We decided that the appropriate redress was to place Mrs E back in the position she had been in before transferring her funds out of the building society. We therefore required the firm to close the new investment and to place back in
Mrs Es building society account the same amount that, acting on its advice, she had transferred out. No account was taken of the higher income Mrs E had enjoyed from the offshore fund.
The failure of firms to carry out customers instructions in connection with the end of a tax year is a regular cause for complaint.
It can be extremely difficult to establish the amount of redress firms should pay when customers lose tax allowances as a result of a firms failure to act on instructions. Each case needs to be looked at on its own merits and, once a firms liability has been established, conciliation is often required to establish an appropriate level of redress and settle the dispute.
It is worth noting that, for basic rate taxpayers, the loss of these allowances is not normally as significant a matter in cash terms as they expect. For higher-rate taxpayers, however, the position can be very different. In view of the timing of this edition of ombudsman news, we hope that the following case studies may be particularly helpful.
Mrs L wanted to invest in a stocks and shares ISA (Individual Savings Account) before the end of the tax year and she rang the firm in early March 2000 to ask for an application form. The form that the firm sent her was, in fact, for a unit trust holding not for an ISA.
Mrs L assumed she had received the correct form. She filled it in and returned it to the firm on 24 March, with a cheque for £7,000. The application form had stated clearly that it was for a unit trust holding, but two sections of the form could have led her to believe that she had to buy units in the unit trust before the investment was converted to an ISA.
On 29 March, she received confirmation from the firm that it had received her application. She believed from this that she had an ISA for the 1999/2000 tax year. She was therefore very confused when, towards the end of April, the firm sent her confirmation that it had recently received her application for a stocks and shares ISA for the 2000/2001 tax year.
It appeared that although the firm had invested her money before the end of the tax year, it had, mistakenly, put it in a unit trust, not an ISA. When it realised the mistake, it made arrangements to transfer Mrs Ls investment in to an ISA for the 2000/2001 tax year.
The loss of Mrs Ls 1999/2000 ISA allowance put her at a financial disadvantage and we suggested that the firm should pay compensation of £700 (10% of the original amount to be invested), together with a further £50 for distress and inconvenience. The complaint was settled on this basis.
Mrs H decided to top up her 2000/2001 ISA in order to bring the amount in the account up to the limit of £7,000. She therefore arranged to transfer £5,055 into her ISA from other funds she held with the same firm. It appears, however, that the firm gave Mrs H incorrect bank details. This resulted in the transfer not taking place and in her subsequently missing the deadline for the tax year.
The firm admitted its fault and offered to pay Mrs H £150 for the distress and inconvenience caused. However, it then compounded its error by telling Mrs H that if she sent in a cheque, it would be added to the ISA, even though the deadline had passed. The firm later had to withdraw this offer, as it would have breached Inland Revenue rules if it had added the additional funds at that time.
Mrs H said that she had intended to hold the ISA for 5 years and she asked for compensation in the region of £1,000. This was the amount of tax (at the higher rate) that she said she would have paid, assuming a 10% growth rate over that 5-year period.
We were satisfied that Mrs H would have held the ISA in question for at least 5 years and that she intended to use her full ISA allowance in each year. We therefore considered that the firms failure to provide the correct information had resulted in the permanent loss of £5,055 ISA allowance.
The firm agreed to pay compensation based on the loss of tax-free income for the year 2000/2001, compounded over the five-year period, together with payment of the sum of £150 that they had already offered. Mrs H agreed to settle on this basis.
Mrs Ds complaint concerned the firms delay in processing her application for a stocks and shares ISA for the following tax year. The firm apologised and offered to set up a unit trust for her, at the price she would have obtained if the ISA had gone through. It also offered to pay her £100 for the distress and inconvenience it had caused.
Dissatisfied with this, Mrs D referred the complaint to us. We were able to settle the matter by conciliation. We pointed out to Mrs D that if her ISA application had gone ahead, her money would have been invested in the same unit trust that the firm was now offering to put her money in. All she would have lost was the tax-free status provided by the investments ISA "wrapper". She told us that she had planned to keep the ISA for five years. Since she was a basic-rate taxpayer, it was exceptionally unlikely that she would have gained sufficient income from her investments over five years to become liable for Capital Gains Tax. So the loss of the tax-free status was, in fact, negligible.
Mrs D decided to go ahead with the unit trust investment and to accept the sum that the firm offered for distress and inconvenience.