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ombudsman news

issue 25

February 2003

investment case round-up

This selection illustrates some of the complaints we have dealt with recently about a wide range of investment matters.

unexpected credit to bank account - money paid in error - customer refuses to pay it back

In December 1999, a pensioner, Mrs D, was surprised to find that £480 had been credited to her bank account. She telephoned her bank and was told the payment had come from an investment firm.

For well over a year after this, £480 was credited to her account every month. Finally, Mrs D contacted her bank manager about these payments, admitting she did not know why she was being credited with the money. She said she had not had any dealings with the firm. The bank manager contacted the firm on her behalf, established that the firm had paid the money in error, and passed on to Mrs D the firm's request that she should pay it back. By this stage, the total she had received was over £8,000.

Mrs D refused to pay. She said that the firm had "unlawfully accessed" her bank account in order to pay in the money. She also said that she had changed her lifestyle as a result of the firm's error, so the firm was being unreasonable in expecting her to pay the money back. The firm did not agree and eventually she brought her complaint to us.

complaint rejected
In our view, it was not reasonable of Mrs D to have assumed the money was hers, since she had never had any dealings with the firm. We also noted that Mrs D had waited for well over a year before asking her bank manager to contact the firm about the payments.

We rejected Mrs D's complaint. We told her that the firm was legally entitled to recover the money. However, we pointed out that the firm was prepared to allow her to pay the money back in instalments over an extended period of time.

Mrs D refused to accept that she should pay back any of the money. She said that she was entitled to keep it, since it was the firm's fault that it had made the payments. She is currently waiting to hear further from the firm.

As Mrs D did not accept our explanation of the legal position, we were unable to take the matter forward. If the firm takes proceedings, she will have an opportunity to test her argument in court.

mortgage endowment - suitability of a managed fund for a low-risk investors

On the firm's advice, Mr A took out a unit-linked mortgage endowment policy. The policy was invested in the firm's managed fund. This was similar to other managed funds on the market, with over 65% of the fund consisting of shares, including some overseas shares.

When the firm rejected Mr A's subsequent complaint that the policy had been mis-sold, he brought his complaint to us.

complaint upheld
It was clear that the policy represented too high a risk for Mr A's circumstances. The "fact find" completed at the time of the sale noted that he was only prepared to take a low level of risk with his investment. Because the policy was invested in the firm's managed fund, we considered it suitable only for investors prepared to accept at least a medium degree of risk.

The firm argued that:

  • Mr A had not complained specifically about the firm's managed fund, so there was no need for this to feature in our consideration of the complaint.
  • it had provided Mr A with a copy of its funds guide. This included sufficient details to enable him to make an informed choice about the most appropriate fund.
  • compared with the other funds in the firm's range of funds, the managed fund represented only a low/medium risk.
  • the firm's managed fund had demonstrated lower volatility than similar funds provided by other firms.

Our response was as follows:

  • the essential point was that the firm's sale of this policy had been unsuitable for Mr A. It was irrelevant whether he had been able to pinpoint the precise reason for his dissatisfaction when he complained about mis-selling. A complaint to the ombudsman service is not the same as a legal pleading and we do not confine our examination of a complaint to the specific matters identified by the customer.
  • Mr A did not appear to have made a conscious choice of the managed fund. He had gone to the firm for advice, not simply to give it his instructions, and the firm's representative had recommended this fund.
  • the level of risk represented by this fund, compared with other funds in the firm's range, was immaterial to the issue of mis-selling, as was the fund's past performance.

We ordered the firm to transfer Mr A to a repayment mortgage and to provide appropriate compensation, calculated in accordance with Regulatory Update 89 (RU89).

"whole-of-life" policy sold instead of a savings plan - firm's paperwork destroyed

In 1989, Mr and Mrs J contacted the firm to discuss how best they might save for future university fees for their daughter, then aged three. On the advice of the firm's representative, they made regular payments into a "whole-of-life" policy.

They said that it was only around the time of their daughter's sixteenth birthday, when they decided to check how their "savings" were doing, that they found they had not been paying into a savings plan at all. They complained to the firm that they had specifically asked for a savings plan, not life insurance.

The firm rejected the complaint, saying the couple had no evidence that their main aim had been to save for their daughter's future education. The couple then came to us.

complaint upheld
We found that, some years previously, the firm had destroyed all the paperwork relating to the original sale. We were not able to obtain a report from the adviser concerned, as he had long since moved to work elsewhere.

Mr and Mrs J's version of events appeared probable, and the firm was unable to produce any evidence to contradict it. We therefore upheld the complaint and required the firm to refund all the premiums the couple had paid, together with interest.

inappropriate advice on pension arrangements - firm's promise to match what customer would have got from company scheme

When Mr D sought advice on ways of boosting his pension arrangements, the firm advised him to take out a free-standing additional voluntary contribution (AVC) policy, even though he had the option of joining the AVC scheme on offer where he worked.

It was some time before Mr D realised that he would have been better off joining his company scheme. After he complained to the firm, it accepted that its advice had been inappropriate. It attempted to put things right by transferring Mr D into his company AVC scheme. However, the rules of the company scheme meant that this was not possible.

So the firm suggested that Mr D should retain his existing policy and said that, when he retired, it would "top-up" the benefits he received to ensure they matched what he would have got from his company AVC.

Mr D refused to accept this offer. He said he doubted whether the firm would honour its promise when he retired in 12 years' time. He also said that he did not trust the firm to make a correct calculation of the difference in benefits of the two schemes. He therefore referred the dispute to us.

complaint rejected
We considered that the firm had offered a fair and reasonable solution to the dispute. It had provided a written assurance that it would use information provided by the company scheme when it calculated the extent to which it would have to "top-up" Mr D's benefits when he retired.

Mr D remained sceptical that the firm would honour its promise, but he accepted that he would have to trust the firm to do what it had promised.

endowment policy documents sent to customer's previous address - customer accuses firm of colluding with third party to defraud him

Just before Dr C's endowment policy matured, the firm wrote to him. It enclosed forms that it needed him to sign in order to authorise payment of the policy proceeds. But unfortunately, the firm sent the letter and forms to an address abroad, where Dr C had lived for a time several years earlier. He had given the firm his UK address as soon as he returned to this country.

It was only when Dr C contacted the firm, after realising that his policy's maturity date had already passed and that he had heard nothing from the firm, that he discovered the letter and forms had gone to the wrong address.

Dr C was extremely angry that the firm had sent confidential information to a third party. And he accused it of colluding with that third party in a fraudulent attempt to obtain the proceeds of his policy.

Dr C demanded compensation from the firm, totalling £670,000. This comprised:

  • £500,000 for "stress, severe emotional trauma and depression";
  • £75,000 for loss of income;
  • £20,000 for the cancellation of the holiday he had been planning to take as soon as the policy matured; and
  • £75,000 for "unwelcome intrusion into [his] life by criminals".

When the firm said it would only offer him £500, Dr C brought his complaint to us.

complaint rejected
The firm's original letter to Dr C had been intercepted by someone at his former address, who had fraudulently completed the forms and returned them to the firm. The firm had spotted at once that the signature was not genuine and that there were inconsistencies in the way in which the form had been completed. The firm had not released the policy proceeds and had still been investigating the matter when Dr C got in touch, shortly after the policy matured.

There was no evidence to show that Dr C had suffered the stress, illness and loss of income for which he claimed compensation. And he had suffered no financial loss as a result of the firm's error. It had promptly paid him the proceeds of his policy, together with interest, as soon as it heard from him and obtained the correctly signed and completed forms.

The firm had already apologised for its error in sending the letter to the wrong address and had offered Dr C £500. We considered this reasonable in the circumstances. We therefore rejected his complaint.

income-producing unit trust - inappropriate advice

When Mr L retired, he sold his home and bought a cheaper property in order to help fund his retirement. He had no other investments and only a very small pension. After buying his new house, he had approximately £317,000 and he sought the firm's advice on how best to invest some of this capital.

On the firm's recommendation, Mr L invested £244,000 in an income-producing unit trust. But when he received his first annual statement, Mr L was concerned to see how badly this investment had done. His capital was substantially reduced.

Mr L complained to the firm, stressing that its representative had not fully explained the risks in this type of investment. When the firm refused to uphold his complaint, he came to us.

complaint upheld
We noted that the documents Mr L was given at the time of the sale did explain that the investment involved some degree of risk. But there was no evidence that the firm had considered how Mr L could:

  • fund his need for long-term income if the value of his investment fell substantially; or
  • reduce the possibility of loss by investing in more than one kind of product.

We concluded that the firm should not have advised Mr L to put such a large proportion of his capital into this unit trust. The firm accepted our view and it agreed to return Mr L's initial investment with interest.

single premium insurance investment - unsuitable advice causing unforeseen tax liability

In 1992, acting on the firm's advice, Mr H invested a lump sum of £9,500 in a single premium insurance investment. He said that he told the firm the policy was to be taken out on his wife's life, with a term of eight years.

In 2000, the policy matured with a value of approximately £19,000. But Mr H was most concerned to find he had a tax liability of approximately £1,900. He complained to the firm, saying that his intention had been to avoid paying tax by setting up the investment in his wife's name, and eventually transferring the capital to her.

The firm denied that Mr H had instructed it to set up the investment in his wife's name. It said that if Mr H thought the firm had made a mistake, he should have mentioned it earlier. It said that his name, not his wife's, was given on the policy document and on the bonus statements it had sent out each year.

complaint upheld
Mr H told us that he had never received a policy document, but he sent us copies of the annual bonus statements. These had been addressed to his wife and showed her name, not his, as the policyholder. Mr H also submitted a financial planning report, prepared for him by a different firm around the same time he had made the investment in question. This showed that he had made a number of other investments in his wife's name.

We felt that Mr H's intentions were clear and that it was most unlikely he would have failed to explain his requirements to the firm.

We concluded that if the firm had dealt with this appropriately, he would not have incurred this tax liability. So we said that the firm should put Mr H in the position he would have been in, but for the firm's negligence. We required it to pay an amount to cover the tax liability, plus interest.

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.