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ombudsman news

issue 67

February / March 2008

case studies illustrating recent
investment-related complaints, including stockbroking and spread-betting

issue 67 index of case studies

  • 67/7 - stockbroker recommends penny shares to client seeking medium-risk investments
  • 67/8 - stockbroking firm led client to believe it would actively manage his investments but failed to do so
  • 67/9 - after incurring a substantial loss, customer says spread-betting business misled him
  • 67/10 - "advisory managed" client blames stockbroker for poor performance of his portfolio

stockbroker recommends penny shares to client seeking medium-risk investments

Mr K, who was 74 years old and retired, was contacted by a firm of stockbrokers that specialised in higher-risk investments. He agreed to become an "advisory-managed" client of the firm. This meant that the firm would advise him about what investments it thought he should consider buying or selling. However, it would not buy or sell on his behalf.

At the time, Mr K had £120,000 in his building society account, £50,000 in shares, and a modest amount in PEPs and ISAs. After noting that Mr K wanted to invest for capital growth, and recording his attitude to risk as "medium", the firm recommended that he should buy penny shares in three companies. The shares sold to Mr K were among a large number of penny shares that the firm had already bought, and had on its books.

Penny shares are shares in small companies and - typically - the individual shares have a low market value. The shares are considered to be speculative. This is because although they offer the prospect of sizable returns - over and above those generally available from 'blue chip' shares - the companies issuing the shares tend to have limited assets and a short operating history, so performance is likely to be volatile.

After a while, Mr K grew concerned about the declining value of his investment in these shares. He complained to the firm, saying he felt he had been badly advised because the shares represented a higher level of risk than he had wanted to take.

The firm accepted that the shares it had recommended to Mr K were high-risk investments. However, it argued that its advice had been appropriate, when viewed in the context of Mr K's overall financial position. Unhappy with the firm's stance, Mr K then came to us.

complaint upheld
We noted that the firm's terms and conditions stated that it would advise clients on individual investments - not on their entire investment portfolios. And it stressed that it took no responsibility for constructing or monitoring the performance of clients' portfolios. As a general point, we normally accept that a medium-risk portfolio may reasonably include an appropriate balance of medium-, high- and low-risk investments.

However, in this case the firm was not advising Mr K about a portfolio. All it was doing was recommending an individual investment. And having established that Mr K required an investment that carried only a medium level of risk, it had recommended that he should buy shares that carried a high risk.

We therefore agreed with Mr K that the advice he had been given was inappropriate. We directed the firm to compensate Mr K for the difference between the value of the shares and the value his investments would have had, if he had invested the same amount in line with the FTSE All Share Index.

stockbroking firm led client to believe it would actively manage his investments but failed to do so

Mr W said that a stockbroking firm persuaded him to invest in some high-risk shares, on the basis that it would monitor his investments and trade them on his behalf, to maximise his returns and minimise any losses. He said he was attracted to this type of service because his work entailed a large amount of overseas travel and left him little time to look after his investments.

Around eighteen months later, after returning home from a lengthier than usual trip, Mr W was concerned to find that the value of his investments had fallen very considerably. Noting that the firm had not made any change to his portfolio of shares since he had bought them, he decided to complain. He said he had been led to believe his shares would be actively managed and he thought that if the firm had done what it had promised, he would not have lost so much money.

The firm referred Mr W to the terms and conditions he had signed. These stated that the firm was under no obligation to monitor his investments or provide ongoing advice. Mr W then brought his complaint to us.

complaint upheld
Mr W said he felt the firm had misled him. He told us that its representative had stressed that his investments would be actively managed - and it was this that had persuaded him to use the firm. He accepted that he had signed the terms and conditions. But he said the representative had told him the paperwork was "merely a formality" and that there was no need to read it before signing.

In view of the extent of Mr W's overseas travel, we thought it was certainly plausible that he would have been attracted by the prospect of having his shares actively managed.

And after considering all the evidence, we concluded that it was more likely than not that Mr W had only invested in the shares because of misleading information given to him by the firm's representative at the time of the sale. We therefore upheld the complaint.

after incurring a substantial loss, customer says spread-betting business misled him

Mr G often took part in spread-betting. Essentially, this involves taking a bet on future events, such as the movement of financial indices (the FTSE, NASDAQ etc) or - as in this case - on the outcome of sporting fixtures. It is a high-risk activity in which, 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.

Towards the end of a Premier League season, Mr G decided to make a bet on which group of teams would finish in the top six. He bet that only one of the teams that was outside the top six when the bet was made would finish there at the end of the season, and that this particular team would finish fourth.

It turned out that Mr G had not fully calculated all of the possible bet outcomes. His exposure to risk was therefore greater than he thought. After suffering heavy losses, he complained to the business that had taken his bet. He said it had misled him about the details of the bet and he would never have made the bet if he had understood the risks involved.

complaint not upheld
We listened to the recording the business had made of Mr G's phone call to place the bet. It was clear from this that Mr G understood the overall mechanics of the bet. However, it was apparent from parts of the dialogue that he had made a miscalculation about the possible outcomes. Mr G did not question this point with the business and it did not correct him.

Mr G was experienced in spread-betting and there was no doubt that he was fully aware of the high risks involved.
We decided, in the circumstance of this case, that there was no onus on the business to point out Mr G's misunderstandings of some aspects of the bet details. We did not uphold the complaint, so Mr G remained liable for his losses.

"advisory managed" client blames stockbroker for poor performance of his portfolio

Mr D was contacted by a firm of stockbrokers that recommended a variety of investments, most of which were considered to carry a high level of risk.

After a couple of years, the value of Mr D's portfolio of investments had fallen to a significantly lower level than the sum he had originally invested. Mr D complained to the firm that his investments had fallen in value as a result of the firm's poor advice.

The firm refuted Mr D's claims, insisting that the poor performance resulted purely from unfavourable market conditions - which were beyond its control.

The firm also denied having given Mr D any advice. It said he had decided for himself on the content of his portfolio - and how it should be managed. Mr D then brought his complaint to us. He said the firm had promised him at the outset that it would keep an eye on his investments and advise him to buy when the market was low and sell when it was high. He felt it was clear from the diminished value of his portfolio that the firm had not done what it had promised.

complaint not upheld
We noted that Mr D was an "advisory managed" client of the firm. This meant that the firm would not actively trade investments on his behalf. Instead, it would make recommendations to him on how he should manage his portfolio.

We looked closely at the transactions that had been carried out since Mr D had become a client of the firm. From this, it was clear that the firm had been making regular recommendations, which we considered to be entirely appropriate.

Mr D had been making up his own mind on how to manage his portfolio and, on a number of occasions, had taken decisions which deviated considerably from the firm's recommendations. We did not uphold Mr D's complaint.

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ombudsman news issue 67 [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.