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ombudsman news

issue 51

January/February 2006

investment disputes where the firm claims to have acted on an execution-only basis – or to have given only "limited" advice

In some of the complaints we receive about the inappropriate sale of investment products, the firm claims – incorrectly – that it acted on an execution-only basis. And some firms say they are not responsible for the suitability of the product because they provided only "limited" advice.

Most of these cases involve sales by independent financial advisers that took place before 1 December 2001, when the current regulatory regime under the Financial Services and Markets Act took effect.

As with any of the complaints we deal with, we refer to the regulations in force at the time of the sale. And in our view there is no "half-way" house of "partial" or "limited" financial advice as far as sales to private clients are concerned. Unless the sale was clearly carried out on an execution-only basis, then the firm was under a duty to provide suitable advice.

(The provision of basic advice is not relevant in the context of this article as it applies only to the sale of stakeholder products after April 2005 – see edition 49 of ombudsman news, for more about this.)

A firm carries out transactions on an execution-only basis if the customer asks it to sell a specific, named investment product, without having been prompted or advised by the firm. In such instances, customers are responsible for their own decision about the product’s suitability.

The practice of execution-only sales is long-established. It is covered by current FSA regulations. But it was also covered by the earlier regulatory regime. As long ago as July 1988, the Life Assurance and Unit Trust Regulatory Organisation (LAUTRO), set out guidance for such sales in its Enforcement Bulletin 1.

Guidance was also provided by the PIA (Personal Investment Authority) in May 1997 in its Regulatory Update 33, which refers to the need for firms carrying out execution-only transactions to provide "clear and credible" evidence of the nature of these sales.

In the disputes referred to us we would normally expect to see some evidence, in writing, that the firm:

  • gave no advice; and
  • made it clear at the time of the sale that it was not responsible for the product’s suitability.

It would have to be entirely credible that the customer entered into the investment on an execution-only basis. And we would have to be satisfied there was no evidence that the customer was misled.

Firms’ obligations when selling investment products other than on an execution-only basis are covered by both the current FSA rules and the rules of the earlier regulatory regime. These include a requirement to "know your client", a duty to make suitable recommendations, and a duty to explain the risks involved – in terms that the customer is likely to understand. Despite what some firms seem to believe, these obligations apply even where the firm has shared some of the product provider’s commission with the customer.

The following case studies provide examples of where a firm has – incorrectly – claimed that it operated on an execution-only basis, or that it provided only "limited" advice.

case studies

investment disputes where the firm claims to have acted on an execution-only basis – or to have given only "limited" advice

firm denies responsibility for inappropriate sale, claiming it gave only "limited" advice

Mr J contacted an independent financial adviser, mentioning a high-income bond (sometimes known as a "precipice" bond) that he had seen advertised in the press. Mr J and his wife wanted to invest a capital sum of approximately £300,000. The income they got from this capital would form their main source of future income, as they had little pension provision.

The adviser offered a positive opinion of the bond and forwarded Mr J an application form to complete. The adviser subsequently sent Mr J a letter saying the transaction had been carried out on a "limited advice" basis.

Not long afterwards, Mr J approached the adviser again, saying he was seeking a way to invest the proceeds of a maturing investment. The adviser suggested four possibilities, including another high-income bond – which Mr J subsequently invested in. Again, the firm sent him a letter saying the transaction had been carried out on a "limited advice" basis.

The following year, concerned about poor returns from both of his bonds, Mr J complained to the adviser’s firm. He said he had received poor advice and had never been warned of any risk attached to his investments. When the firm rejected the complaint, Mr J came to us.

complaint upheld
The firm argued that it was not responsible for the appropriateness (or otherwise) of either of these bonds, as it had made it clear that it had given only "limited" advice. It said that in the first transaction it had given only a general opinion of the product Mr J had selected for himself. And for the subsequent transaction, it had "simply offered a few suggestions for Mr J to research for himself".

As we have noted, in our view there is no category of "limited" financial advice as far as sales to private clients are concerned. And it was clear to us that the firm had not carried out either of these transactions on an execution-only basis. The firm had made recommendations that had guided Mr J in his investment decisions. So it was responsible for the sale.

We were concerned not only about the suitability of the firm’s recommendations, but also about its failure to provide any risk warnings. We concluded it was unlikely that Mr J would have proceeded with the investments if the firm had given him appropriate risk warnings, even if the bonds had been suitable for him. And on the facts of the case we did not think they were suitable. We therefore upheld the complaint.

firm claims it sold investment on "execution only" basis, despite clear evidence to the contrary

In May 2000 Mr G invested £90,000 in an offshore structured capital-at-risk bond (sometimes known as a "precipice" bond). When the bond matured in August 2003, Mr G discovered he had lost around £50,000.

He complained to the firm, saying that if the adviser had explained there was a risk he could lose so much, he would never have invested. When the firm refused to uphold the complaint, he came to us.

complaint upheld
The firm denied any responsibility for the suitability of the bond. It told us Mr G was an "experienced and sophisticated investor" and that it had simply given him "factual information".

The firm said Mr G had been its customer for nearly 30 years and – in its view – was well able to reach his own conclusions about the product’s suitability. As further "evidence" that it had not provided advice, it said it had rebated 50% of the commission on this transaction.

We found no evidence that this was an execution-only sale. The fact that the firm had rebated half its commission did not, of itself, indicate that it had not given advice. Firms may forego commission for a number of reasons, for example, where a customer is making a number of investments at the same time, or as a gesture of goodwill to a long-established customer or personal friend.

We established that, some two weeks before it had a meeting with Mr G, the firm had sent him a brochure for the bond in question. At the subsequent meeting, the firm had discussed with him, in very general terms, the risks of structured capital-at-risk bonds, as well as talking about other investment options such as with-profit bonds. And after the meeting it gave Mr G a Key Features document and a full product brochure for the bond.

In our view, these actions made it clear that the firm had not carried out the transaction on an execution-only basis. Rather, Mr G decided to invest after being prompted to do so by the firm.

We were not persuaded that the investment was suitable for Mr G’s needs and circumstances at the time. The fact that he had previous dealings with the firm, dating back over 30 years, and that he had received 50% of the commission on the sale, did not mean the firm could ignore its duty to provide suitable advice. We upheld the complaint.

Walter Merricks, chief ombudsman

ombudsman news issue 51 [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.