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ombudsman news

issue 28

May 2003

investment case round-up

a selection of some of the investment-related complaints we have dealt with recently

single-premium payment into unit-linked personal pension - customer wrongly advised

In 1999, when he was 63 years old, Mr D was advised to make a single payment of £8,000 into a unit-linked personal pension. He said he had wanted to put this money into a savings account. However the firm's representative had persuaded him that he would be better off paying it into a personal pension instead.

Two years later, when Mr D retired, he got less from the personal pension plan than he would have done if he had left his money in a savings account. The firm refused to uphold his complaint so he came to us.

complaint upheld
Initially, the firm refused to accept our view that Mr D had been wrongly advised. The case therefore went to the final stage in our complaints-handling process and received an ombudsman's final decision.

The ombudsman agreed with our case-handler's initial view that the pension plan had been mis-sold. The "fact find" that the representative had completed at the time of the sale recorded that Mr D had always planned to retire at the age of 65. This meant that his investment had a maximum of two years to grow. Two years is very little time for a pension plan to grow sufficiently even to recoup the initial charges. Moreover, because the pension was unit-linked, it was subject to stock market fluctuations, so we felt it was suitable only as a medium- to long-term investment. Two years was not medium - to long-term.

Rather than asking the firm simply to refund Mr D's initial investment plus interest, we asked it to amend the annuity. We told it to assume that the value of Mr D's pension fund on the day he retired was equal to the amount of his initial investment, plus interest. It should then base his annuity on that amended amount. We also asked the firm to refund, with interest, the difference between the annuity payments Mr D had already received to date and those he should have received, based on the amended amount.

surrender value quoted over telephone - whether this was misleading

Mrs T needed to cash-in her unit-linked bond earlier than she had originally expected. She telephoned the firm to find out how much she would get. But when she surrendered the policy some weeks later, she received £940 less than she said the firm had led her to expect. She asked it to pay her £940 to bring the payment up to the "correct" amount. When the firm refused, she referred the complaint to us.

complaint upheld
In support of its case, the firm sent us a taped recording of Mrs T's telephone call to its customer service department. During the call, the representative said that the policy's surrender value would be "around" £7,000. However, he stressed that this value could not be guaranteed and would be subject to any market fluctuations in the period before she surrendered the policy.

We considered that the representative's statement about the amount Mrs T would receive was somewhat misleading, even though he had made her aware that the figure he quoted was not guaranteed. When Mrs T had asked the representative if the value could be much more or less than the figure he had quoted, he replied that he could not say, but that it would be "close" to £7,000. We did not think that a reduction of £940 left a sum that was particularly "close" to £7,000.

The firm offered to:

  • reinstate the bond, if Mrs T returned the payment it had sent her for the proceeds of the policy; or
  • pay her £470 (50% of the difference between the policy's actual surrender value and the value it had quoted over the telephone).

Mrs T accepted the second option.

mis-selling of mortgage endowment policy

Ms A's complaint concerned a with-profits mortgage endowment policy. She said she had been reluctant to take out an endowment mortgage, but the firm's representative had persuaded her to do so. He had told her that the policy would not only repay her mortgage, but also provide her with a sizeable lump sum.

complaint upheld
Because the firm was unable to provide much documentation about the sale, we asked Ms A to complete our mortgage endowment questionnaire. Her answers showed that she was single with no dependents. She was a member of her firm's occupational pension scheme and the scheme included life cover. She had no other savings or investments, and she described her attitude to risk as "Cautious 1" on a 1-10 scale.

We concluded that, in the circumstances, the sale of an endowment policy had been unsuitable. The firm agreed and offered to pay redress, to be calculated in accordance with Regulatory Update 89.

However, when Ms A was given details of the redress, she told the firm that this was insufficient. She said she wished it to calculate redress using her own, "more appropriate", formula. She refused to accept our assurance that the formula the firm was using was that set down by the regulator for use in all such cases.

All attempts at mediation failed, so the matter was referred to an ombudsman for a final decision. The ombudsman confirmed that the complaint should be upheld and that the firm's offer had been correctly calculated, in accordance with the regulator's guidance. Ms A then decided to accept the firm's offer.

unit trust ISA - customers disagree with trust's conversion to an OEIC

Several years after Mr and Mrs Y each invested £3,000 in a unit trust ISA (Individual Savings Account), the firm contacted all unitholders about a proposed conversion of the unit trust to an OEIC (Open Ended Investment Company). For the proposal to succeed, at least 75percent of unitholders had to vote in favour of the conversion.

Although Mr and Mrs Y voted against it, the proposal went ahead. The couple then complained to the firm that, as a result of the conversion, they felt they no longer held the policies they had "requested and signed for".

complaint rejected
We established that, under the terms and conditions of the original unit trust, the firm had the right to propose the conversion. And once the required number of policyholders had voted for the conversion, the result was binding on all unitholders, irrespective of how or whether they voted.

Mr and Mrs Y did not suffer any financial loss as a result of the conversion. And they still retained the right to transfer their ISA to another firm if they felt their investment was no longer appropriate. We therefore rejected their complaint.

investment in corporate bond and gilt fund - whether adviser's letter to switch funds constituted advice

In 1997, on the firm's advice, Mrs M invested £7,500 in the firm's corporate bond and gilt fund. Three years later, Mrs M wrote to the adviser because she had concerns about the fund's poor performance. In his reply, the adviser wrote:

"You may wish to consider transferring your plan into another fund, such as the European Fund, and I am enclosing our Investment Record which shows the performance of our funds, for your information".

As a result, Mrs M decided to switch funds. However, within a fairly short time, the value of her investment dropped considerably more than it would have done had she not switched. She complained to the firm, saying she held it responsible for her losses. She maintained that the adviser had suggested the switch and she said he had not told her that the European Fund represented a greater risk than her existing investment. When the firm refused to uphold her complaint, she came to us.

complaint upheld
We considered that the adviser's letter had constituted a recommendation and had encouraged Mrs M to take a specific course of action. If the adviser had not intended his words to be understood as giving advice, then he should have made that clear.

If he had intended to advise Mrs M, then he should first have made sure he was fully aware of her current circumstances and requirements. He should also have explained that she would be increasing her exposure to risk if she switched.

We ordered the firm to make good any loss that Mrs M had suffered as a result of switching, and to pay her £250 for distress and inconvenience.

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.