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ombudsman news

issue 31

September 2003

investment case round-up

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

"ethical" investment bond - whether advice appropriate for customers' attitude to risk

After inheriting a sizeable sum of money, Mr and Mrs F consulted a financial adviser. The couple had no investment experience and said they were happy to be guided by the adviser. They said they hoped the money might be invested in "ethical" companies.

The couple followed the adviser's recommendation to invest £24,000 in an investment bond. However, several years later they complained that this advice had been inappropriate. When the firm rejected their complaint, Mr and Mrs F came to us.

complaint upheld
The firm insisted that the investment that the adviser recommended had been suitable for Mr and Mrs F's needs and circumstances, and consistent with their attitude to risk.

The firm conceded that the ethical investment bond presented a higher risk than it would normally have considered suitable for the couple. But it said the couple had insisted on an ethical investment and they required a higher income than would be available from either a deposit-type account or a low-risk investment. It said the adviser had made the couple fully aware of the risks involved.

Mr and Mrs F denied that the adviser had explained the level of risk associated with the investment bond. They said that although they liked the idea of an ethical investment, they had not insisted that this was the only type of investment they were prepared to consider. They said they had asked about the possibility of using the money to pay off their mortgage, but the adviser had very firmly advised against it. They told us they had believed all bonds to be a safe form of investment. They had not realised there were different types of bonds, and that some carried a high risk.

We noted that, for some years, the couple had been living on a very low income, as Mr F was in poor health and receiving disability benefits.

In our view, the investment advice had not been suitable for their circumstances because it presented too high a risk. There was no evidence that the adviser had given the couple any warning about the risks involved. We considered that he should only have gone ahead and arranged the investment after he had set out the risks in writing and obtained written confirmation from the couple that they wished him to proceed. We considered, on a balance of probabilities, that if the adviser had given Mr and Mrs F a clear warning of the risks involved, they would not have gone ahead with the investment.

We asked the firm to refund the premiums the couple had paid, with interest.

transfer of a with-profit bond to a unit trust - whether customer wrongly advised

Early in 2000, a 64-year-old widow, Mrs A, met the firm's representative to discuss her investments. On his advice, she surrendered the with-profit bond she had held for four years and put the money in a unit trust instead. She said the adviser had told her the unit trust offered "superior tax advantages".

Two years later, after seeing the value of her unit trust investment fall substantially, Mrs A complained to the firm. She said it should never have advised her to switch from the with-profit bond. When the firm rejected her complaint, she came to us.

complaint upheld

Mrs A said she had not been aware that investing in the unit trust involved any risk, and that the adviser had not discussed this with her. We found no evidence to refute what she told us. It was clear from the "fact find" that the adviser had not made a full assessment of Mrs A's circumstances. And there was no evidence of any attempt to quantify how she would benefit from the tax advantages he had said she would get. We therefore upheld the complaint.

mortgage endowment policy - whether firm took customer's change of circumstances into account

Mrs H was alarmed when the firm sent her a "re-projection" letter, warning that the mortgage endowment policy she had taken out ten years earlier might not produce enough to pay off her mortgage. She complained to the firm, saying the firm's adviser had not warned her of this possibility when he sold her the policy.

The firm rejected Mrs H's complaint. It said the problem was due to "poor investment performance, something that was always a possibility with this type of policy", and it claimed that the adviser had given her a brochure that explained this. Dissatisfied with this response, Mrs H came to us.

complaint upheld
The firm should have determined Mrs H's attitude to risk at the time of the sale. But it was unable to produce any evidence that it had done so. After we questioned Mrs H about her circumstances at the time of the sale, we established that - when she had sought advice - she had not been in a position to take any risk with her mortgage. She and her husband had previously had a mortgage endowment policy, but her circumstances had changed dramatically since then. She was a single mother on a low income when the firm sold her the new policy.

We therefore concluded that the advice had been unsuitable and that the firm should provide redress, in line with the regulator's guidance.

firm sold customer three mortgage endowment policies - whether it explained risk - firm offers redress for one policy - customer insists all were mis-sold

When Miss L decided to move house, she discussed her financial situation with her father, who was an investment adviser. She already had a mortgage endowment policy and her father advised her to take out a further two mortgage endowment policies.

Five years later, Miss L received re-projection letters from the firm, warning that her policies might not produce enough to pay off her mortgage. She complained to the firm, protesting that she had never been made aware that these policies carried any risk.

The firm subsequently told Miss L that there was evidence to suggest the third policy had been mis-sold. It offered her compensation for this in accordance with regulatory guidelines. Miss L rejected the offer, saying she should receive redress for all three policies, and she then brought her complaint to us.

complaint rejected
We looked at the "fact finds" that had been completed for all three of Miss L's policies - the original mortgage endowment policy and the two that her father had recommended. It was clear from these documents that Miss L's attitude to risk had been assessed on each occasion, and that the risks associated with the policies had been explained to her.

Miss L was unable to deny this evidence when we pointed it out to her. And eventually she acknowledged that, on each occasion, her adviser had discussed other mortgage options with her. We therefore rejected her complaint.

"execution-only" policy - customer's expectation of additional benefits following firm's flotation - whether adviser acted correctly in selling second policy

Mr G asked an independent financial adviser to obtain information for him about a with-profits policy with a specific firm. He subsequently took out this policy through the adviser, on an "execution-only" basis (that is, without receiving any advice). He had not mentioned to the adviser that he already had a similar policy from the same firm. He knew that, as a policyholder, he would benefit from the firm's forthcoming flotation, and he assumed he would double his benefits by having two policies rather than one.

At the time Mr G took out his second policy, the firm had not finalised the terms of its flotation benefits. In particular, it had not yet decided whether it would provide higher benefits for those who held more than one of its policies.

When the firm announced the full details of the flotation benefits, it said it would pay all policyholders the same level of benefit, regardless of the number of policies held by any individual. Mr G then complained to the adviser, saying he had acted incorrectly in selling the second policy. When the adviser rejected the complaint, Mr G came to us.

complaint rejected
The adviser was not at fault. He had obtained information for Mr G, at Mr G's request, and had subsequently arranged the sale. However, the adviser had not provided any investment advice.

At the time of the sale, the firm had not yet published its terms for the flotation benefits. Mr G was therefore taking a risk that having a second policy would increase his benefits. He had not told the adviser that he already had one policy. And even if he had done so, the adviser would not have been in a position to confirm whether he would be entitled to additional benefits. We rejected the complaint.

firm's delay in payment of pension annuity - customer's expectation of redress - our approach to compensation for distress and inconvenience

Mr A sent us a 35-page submission, complaining about the firm and setting out why he thought it should pay him £20,000 in compensation. The nub of Mr A's complaint was that the firm had been responsible for a significant delay before it started paying his pension annuity. Mr A also noted that the firm had made significant errors in calculating the payments, had ignored his letters and failed to return calls.

complaint settled
In a quick telephone call to the firm, we established that it had already sorted out all the payment problems. Mr A agreed this was the case. However, he said he had decided to bring the complaint to us because of his "utter frustration" about the length of time the firm had taken to resolve matters.

Initially, he remained adamant that he expected £20,000 compensation. However, after we explained our general approach in cases of distress and inconvenience, he conceded that his expectations were unrealistic.

The firm had already confirmed that it had been responsible for serious delays in paying Mr A's annuity and Mr A accepted its offer of £500 compensation.

Walter Merricks, chief ombudsman

ombudsman news issue 31 [PDF format]

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.