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ombudsman news

issue 2

February 2001

case studies - complaints about other types of investment

02/09 This complaint about an IMRO- regulated firm involves the sale of windfall shares.
02/10 This complaint about an SFA-regulated firm concerns spread betting.

The following two cases indicate the wide range of investment matters we deal with. Case studies

We dealt with this complaint about an IMRO-regulated firm under the rules of the Office of the Investment Ombudsman.

02/09

Mr & Mrs R had a capital repayment mortgage for 12 years before they decided to move house in 1992. Initially, they were wary of changing to a different type of mortgage, when the life company representative suggested it. However, they were assured that an endowment mortgage would be cheaper for them. Moreover, the representative said that when the endowment policy matured, it was guaranteed to repay their mortgage.

These were important considerations, not least because Mr R was facing the possibility of redundancy at the time, so they agreed to the change.

In August 2000, the life company sent Mr & Mrs R a "re-projection" letter showing a projected shortfall when the policy matured. This prompted Mr & Mrs R to complain about the advice they were given and about the suitability of the unit-linked endowment policy.

We upheld their complaint on the basis that the policy was not compatible with their attitude to risk. The literature they were given at the time did point out that the policy's maturity value was not guaranteed and would depend on investment performance over the policy term. However, we decided that in the circumstances of this case, this risk warning did not transform an unsuitable sale into a suitable one.

When looking at the question of redress, we found that if Mr and Mrs R had chosen a capital repayment mortgage, they would have repaid £3,440 more, to date, than the amount they would get if they cashed in the endowment policy. And comparing their mortgage outgoings, we found the endowment mortgage was £1,700 more expensive than an equivalent capital repayment mortgage over the same period. So the redress payable to them was the total of these two figures, plus the £125 administration fee they needed to pay to switch to a repayment mortgage. This all added up to £5,265.

In addition, we awarded £200 for distress and inconvenience, since Mr and Mrs R were by now in their early fifties and had suffered a certain degree of distress after learning of the potential shortfall.

This case involves an SFA-regulated firm and was dealt with by the SFA Complaints Bureau. It concerns spread betting, an activity which is regulated under the Financial Services Act 1986.

02/10

Essentially, spread betting involves taking a bet on future events, such as the movement of financial indices (the FTSE, NASDAQ etc) or on the outcome of sporting fixtures. It is a form of gambling which has become increasingly popular in the past few years. However, it is a high-risk activity and not for the inexperienced.

Unlike conventional gambling, you can lose more than your original stake. And you are legally obliged to pay up, no matter how much you lose. Before you enter into a spread betting contract, you are required to sign an agreement acknowledging the terms and conditions of the firm concerned.

Company C is regulated by the SFA and conducts spread betting, taking bets by telephone. Their client, Mr F, placed a bet on how many wins there would be in home games, as opposed to away games, in the English Premiership Football League. In fact, the firm only quotes for home/away goals, not home/away wins. So the bet would be on how many more goals would be scored in home matches than in away matches.

Mr F guessed wrongly and ended up owing the company £2,500. He complained that he had misunderstood the nature of the bet and had thought he was betting on wins, not goals.

When we examined the tape-recording of the telephone dealing conversation (often an essential element in complaints involving equities, derivatives and spread betting), we found that both the client and the dealer referred to "homes over aways" but never specifically mentioned "wins" or "goals". Each assumed he knew what the other meant.

The firm's terms and conditions, which Mr F had signed up to, state that they do not quote for bets on home/away wins. They also state that before customers place any bets, they must familiarise themselves with the nature of spread betting, the jargon used, the market/index hours and the expiry times and dates of the contracts made.

Mr F has reluctantly agreed that he should have ensured he understood the details of the bet he was placing. He has now paid the company the amount outstanding.

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.