skip tocontent

ombudsman news

issue 110

June/July 2013

investment case studies

Over the last ten years or so we have usually seen the performance of the stock market broadly reflected in the number and type of investment-related complaints we have received.

When markets have fallen, we have usually seen more complaints from consumers unhappy about investments losing value. However, over the last year or so, even though stock markets have generally risen, we have not seen the fall in complaints that we might have expected.

We still see a significant number of complaints where an investment product was recommended that carried a level of risk that was not appropriate for the consumer. As the following case studies illustrate, these disputes often involve disagreement between the business and the consumer about the consumer's attitude to investment risk at the point of sale.

In cases involving investments, where we decide that a business has done something wrong, calculating redress can be complicated. We usually tell the business to put the consumer - as far as possible - in the position they would now be in if the problem hadn't happened in the first place. We follow this principle when we recommend compensation.

If we can't identify exactly what the consumer would have done if they hadn't received the inappropriate advice, we may still be able to identify some qualities of the investments they might have taken out. In cases like this, we tell the financial business to compare what the consumer actually got with a benchmark that would broadly reflect those qualities.

We have chosen the following case studies to illustrate how we go about calculating redress - which is why most of the cases are "complaint upheld". The case studies show that when we are deciding on a fair benchmark, we will look carefully at a consumer's individual circumstances - and what they had wanted when they first took out the investment.

In some of the cases we have referred to "the average rate for one-year fixed-rate bonds". The source we use for this rate is the Bank of England one-year fixed rate bond IUMWTFA series. In other cases we have referred to the APCIMS Income index. The source we use for this is FTSE International Limited (2013).

Our online technical resource - available on our website - has more detailed information about our approach to investment-related complaints, including sample calculations.

issue 110 index of case studies

  • 110/1 - consumers complain that they had only wanted a low-risk investment - but were advised to invest in high-risk funds
  • 110/2 - consumer complains he was wrongly advised to invest in high-risk funds
  • 110/3 - consumer complains that he was advised to take out higher-risk investments than he had wanted Mr C had built up £65,000 in savings from buying and selling vintage cars.
  • 110/4 - consumer complains he was wrongly advised to invest in a portfolio bond
  • 110/5 - consumer complains that he lost money on a savings policy - and that he didn't need the life cover that was included
  • 110/6 - consumers complain they were advised to cash in a with-profits bond and invest in a high-risk fund
  • 110/7 - consumer complains about unexpectedly low returns on his policy

110/1
consumers complain that they had only wanted a low-risk investment - but were advised to invest in high-risk funds

Mr and Mrs A had a dog grooming business. They were both in their late sixties and wanted to retire - so they had a look at their finances to see whether they could afford to stop working.

They decided that they needed to find a way of topping up their pensions - and that one way of doing it was to release some equity from their house. So they sold their house and bought a smaller one - and still had £75,000 left over. They got in touch with a financial adviser to get some advice on what to do with the money.

They told the adviser that they only wanted to take a small amount of risk - and that they wanted to use the growth from their investment to supplement their income.

The adviser agreed that Mr and Mrs A should be cautious with their money. She advised them to put the money into a range of investment funds - with two thirds invested in company shares on the stock market and the other third in gilts issued by the government.

A couple of years later, Mr and Mrs A received a statement about their investment. They were worried when they saw that their investments had lost a lot of their value - and they got in touch with their financial adviser to find out what had happened.

The adviser said the investment had lost value because the value of shares on the stock market had fallen. She pointed out that Mr and Mrs A had been looking to get enough regular growth out of their investment to supplement their income.

This meant that they had needed to invest a large proportion of the money in funds that invested on the stock market. The adviser said that this had given them the best chance of getting the return they were looking for.

Mr and Mrs A were not convinced by the adviser's response - so they asked us to look into it.

complaint upheld
When we assessed the evidence, we noted that Mr and Mrs A had been looking for fairly significant growth from their investment to supplement their income. We concluded that to achieve this sort of return, they would probably have needed to take on more risk than they had told the adviser they were prepared to take.

We took the view that the adviser should have explained this more clearly to Mr and Mrs A from the beginning. And we did not think it justified putting two thirds of Mr and Mrs A's money in stock market funds - which had put their investment at greater risk overall than they had been prepared to take.

We agreed that Mr and Mrs A needed to invest cautiously. So we told the adviser to look at what would have happened if half their money had got the same return as the APCIMS Income Index - and half had got the same return as the average rate for one-year fixed-rate bonds as published by the Bank of England.

We decided that this calculation would take into account both Mr and Mrs A's desire for a degree of security - and their willingness to take a small risk. It would also allow for the fact that even with appropriate investments, Mr and Mrs A could have made losses as well as gains.

110/2
consumer complains he was wrongly advised to invest in high-risk funds

Mr B had recently inherited £150,000. He got in touch with a financial adviser because he wanted to invest some of the money.

The financial adviser asked Mr B some detailed questions about his personal circumstances 
and his attitude to investment risk.

On the basis of the answers that Mr B had given, the adviser told him that his attitude to risk had been categorised as "adventurous". The adviser recommended that he invest £50,000 in an Open-Ended Investment Company (OEIC) split between three funds - 10% in "cautious", 20% in "moderate" and 70% in "dynamic" funds.

But when the funds did not perform as well as he had hoped, Mr B complained to the financial adviser. He said he was concerned that the funds were too risky - and that he had made it clear that he had a "medium" attitude to investment risk.

When the financial adviser rejected Mr B's complaint, he decided to refer it to us.
complaint not upheld
We looked carefully through the financial adviser's paperwork. We noted that the adviser had asked Mr B about his attitude to risk. He had given Mr B a series of statements and asked him to respond to them. His response to the statement "I am willing to take substantial financial risk to earn substantial return" was "strongly agree". And he had put "strongly disagree" in response to the statement "when it comes to investing I'd rather be safe than sorry".

We also looked at Mr B's responses to the questions about his personal circumstances - and he had confirmed that he was self-employed, single and that he didn't have any dependants.

The adviser had also written to Mr B explaining that investments that match an "adventurous" attitude to risk were speculative. He had pointed out that "the risk to your capital is high".

Finally, we noted that Mr B had told the adviser that he had previous experience of investments - and that Mr B himself had initially suggested a portfolio involving funds in China, India, Latin America and Africa.

Taking everything into account, we were satisfied that Mr B had been prepared to take a high level of risk with his money - and that his financial circumstances meant he was in a position to do so. In these circumstances, we concluded that Mr B had not received inappropriate advice - and we did not uphold the complaint.

110/3
consumer complains that he was advised to take out higher-risk investments than he had wanted

Mr C had built up £65,000 in savings from buying and selling vintage cars.

When he mentioned to his sister that he wanted to invest some of the money, she gave him the phone number of a financial adviser she had used in the past. Mr C got in touch with the adviser and made an appointment to meet her.

During the meeting the adviser asked Mr C how he felt about taking a risk with his money. She explained that if he was willing to take some risk he might have a chance of getting more growth on his money.

Mr C told the adviser that he was interested in getting more growth, but he said that he wasn't too sure because he hadn't invested any money before. He agreed to answer some more questions about his attitude to investment risk to help the adviser work out which investments might be right for him.

When Mr C had answered the questions, the adviser told him that based on the answers he had given, she rated his attitude to taking risk with his money as "between three and four on a seven-point risk scale" - on which seven was the highest level of risk and one was the lowest level.

The adviser recommended that Mr C invest £30,000 in a range of investment funds. She explained that the funds would be chosen using a computer-based tool designed to "select and blend" investment funds.

Mr C went ahead with the investment. More that three quarters of the £30,000 was invested in shares on the stock market in the UK and overseas. Most of the rest was put into commodity funds investing in oil, gold and agriculture.

Each year, Mr C received an annual statement for his investments. By the fourth year, his statement showed that their value had dropped considerably. Mr C was concerned that he had made a serious mistake, and he complained to his adviser.

The adviser told Mr C that he shouldn't do anything at this stage - because they were supposed to be long-term investments and there was still a chance that they would perform better in the future. But Mr C was still concerned by the drop in value, so he brought his complaint to us.

complaint upheld
When we spoke to the adviser, she pointed out that Mr C had been prepared to take some risk to get a better return on his money. However, when we looked at the detail of the investments - and compared them with the adviser's notes about Mr C's attitude to risk - we were satisfied that the adviser had taken more risk with Mr C's money than he had told her he wanted to take.

We accepted that the computer-based selection tool the adviser had used was standard across the investment world. But we took the view that the adviser had still been responsible for making sure the funds she had advised Mr C to invest in were appropriate for his particular circumstances.

So we told the adviser to work out how Mr C's money would have done if it had been invested in line with the FTSE APCIMS Stock Market Income Index.

Mr C had wanted his investment to produce a reasonable return - and had been prepared to take some risk with his capital. While the FTSE APCIMS Stock Market Income Index includes UK and overseas shares, it does not include as many as there had been in the funds the adviser had selected for Mr C. It also has a mixture of other investments that are usually thought to be safer - for example, UK government gilts. We decided that by comparing Mr C's actual investment with this index, the adviser could compensate him fairly.

110/4
consumer complains he was wrongly advised to invest in a portfolio bond

Mr S was in his early sixties and had been retired for two years. He was receiving a pension income of around £10,000 a year. He had some savings in various building society accounts, but he wanted to get more out of his money. So he spoke to his bank, and he was advised to invest £10,000 in a portfolio bond - which he did.

A few months later, Mr S was concerned that the bond wasn't performing as well as he had hoped. He complained to his bank, saying that he had been badly advised, and that the adviser should have recommended that he pay off some of his existing debts before he invested in anything.

When the bank said it hadn't done anything wrong, Mr S referred the matter to us.

complaint not upheld
When we looked at the bank's paperwork, we saw that the adviser had noted that Mr S wanted to move some of his money from a savings account in the hope of a better return. The adviser had noted down that Mr S had a "cautious" attitude to risk - and that he wanted a product that would guarantee the return of his capital after a five-year period.

The bond that the adviser had recommended had provided that guarantee - and we concluded that it had been appropriate for Mr S's cautious attitude to risk.

When we tried to establish how much debt Mr S had been in at the time he had taken out the bond, the bank's own records weren't entirely clear. But the adviser had recorded that Mr S had around £55,000 in savings - and given that he was investing just £10,000 of that, we concluded that Mr S could have used some of his savings if he had wanted to reduce his debts. We also concluded that he would have had money to fall back on if the investment did not perform as he had hoped.

Taking everything into account, we were satisfied that Mr S had not received inappropriate advice - and we did not uphold the complaint.

110/5
consumer complains that he lost money on a savings policy - and that he didn't need the life cover that was included

Mr V worked in a large department store. He had been working there for four years, and over the past few months he had been finding he had some money left over from his pay. He decided to put it somewhere out of reach - so that he wouldn't be tempted to spend it.

Mr V already had a savings account with a building society. His parents had opened the account for him when he was a child. So when he decided to save money more regularly, the building society was his first port of call.

He phoned customer services to ask for some advice about investing his money. The adviser he spoke to recommended a regular savings policy - which included life assurance cover.

The department store that Mr V worked for was run as a co-operative - and it gave everyone who worked there life assurance as part of their benefits package. So Mr V wondered whether he needed the life cover the savings policy included.

He phoned customer services back to check this - and an adviser told him that the life cover included in this particular policy would pay out a lump sum tax-free. Mr V thought that sounded good, so he took out the policy.

When the policy matured, Mr V was shocked to find that he got back a lot less than he had paid into the policy. He rang the building society to find out what was going on - and was told that it was because of poor stock market performance during the period that he had been paying into the policy.

Mr V complained to the building society. He said he didn't even know his money had been invested on the stock market. He said that he hadn't wanted to touch his money and had been happy to wait for the policy to mature - but he pointed out that he had wanted a safe investment, and that he had not understood that it could lose money.

When the building society rejected his complaint, Mr V asked us to investigate.

complaint upheld
When we looked at the evidence, we established that Mr V's money had been invested in very cautious funds - and in fact, had not been affected much by fluctuations in the stock market. However, the building society had used money from the policy to cover the cost of the life cover it had provided.

Although the policy would have paid out a lump sum tax-free if Mr V had died, the cost of the life cover - and other charges that had applied to the policy - had made it very difficult for Mr V to get a decent return on his investment.

The building society's records showed that "safety and security of capital" were important to Mr V. And we saw no other evidence to suggest that Mr V had been willing to run the risk of losing any money.

We were satisfied that Mr V had wanted to keep his money safe, and that he should only have been recommended a product that did not pose any risk to his capital. We also concluded that Mr V should not have been sold a policy with expensive life cover that he clearly did not need.

We told the building society to pay Mr V the difference between what he got back from the policy and what he would have got if his money had got the same return as the average rate published by the Bank of England for one-year fixed-rate bonds.

By coming to this decision, we weren't saying that Mr V would have invested in a fixed- rate bond. But the return on fixed-rate bonds was a fair and reasonable measure of what Mr V might have got back if he had put his money into a risk-free investment over the same period.

The building society asked us whether the compensation was subject to income tax. We pointed out that this was compensation for investment loss. This kind of compensation isn't usually subject to income tax, even if it is calculated by referring to an interest rate.

However, we also explained that in certain circumstances, a consumer may be liable to pay capital gains tax on compensation - but that the law does not require financial businesses to deduct this from the compensation they give.

110/6
consumers complain they were advised to cash in a with-profits bond and invest in a high-risk fund

Miss G's parents were retired, and had a comfortable income from their pension. Every year or so, they met up with an adviser at their bank to review their finances. At one of these meetings, Mr and Mrs G told the bank that they wanted growth and income from their savings, with some capital security. The bank identified that Mr and Mrs G had a "cautious" attitude to risk.

The adviser recommended that Mr and Mrs G cash in one of their with-profits bonds and invest £20,000 in a property fund. This fund invested in office blocks and retail parks across the UK - and had borrowed money from a number of banks to fund its investment activity. Mr and Mrs G followed the bank's advice and took out the investment.

The value of the fund rose steadily, but Mr and Mrs G started to worry when it began to go down rapidly.

Miss G complained to the bank on her parents' behalf. She asked whether it had been right to tell her parents to cash in their with-profits bond to invest in a fund that could go down so quickly.

When the bank rejected her complaint, she decided to refer it to us.

complaint upheld
The bank did not have any record of having advised Mr and Mrs G to cash in their with-profits bond. But its records did show that the with-profits bond had been in place when its adviser had first met the couple - and we noted that the adviser himself had completed some of the paperwork to cash it in.

Mr and Mrs G told us that the bank's adviser had said that their existing bond was not performing and had helped them to cash it in - and had advised them to invest the proceeds into the property fund two months later.

In these circumstances, we decided it was likely that Mr and Mrs G had cashed in their with-profits bond on the advice of the bank.

We asked the bank why it had recommended that the couple invest their money in a fund that was using borrowed money to invest in property. The bank could not give us a reasonable explanation.

The business that had provided Mr and Mrs G's with-profits bond was willing to restart the bond with the value it would have had if it had not been cashed in - as long as the cost of restarting it was covered. So we told the bank to pay for Mr and Mrs G's bond to be put back in place.

110/7
consumer complains about unexpectedly low returns on his policy

Mr F had a full time job, but over the past ten years he had been working part time as a dance teacher to supplement his income. He had been putting some of his extra earnings into a savings policy.

When the policy matured, Mr F complained to the policy provider that he had only got back £100 more than he had paid in. He said that he had been working extremely hard to put the money away - and had been expecting a far better return on his investment.

The business rejected Mr F's complaint, saying that the returns on the policy were not guaranteed. Mr F didn't feel that the business had considered his complaint seriously, so he decided to get in touch with us.

complaint upheld
We looked carefully at the details of Mr F's policy. We noted that the charges the company had applied meant that the policy would have needed to have grown quite significantly each year just to return what Mr F was paying in. It would have needed to grow even more if it was going to give him a worthwhile return.

So there was a very good chance that Mr F would get little or no return on the money he paid into the policy. In these circumstances, we concluded that Mr F should not have been advised to put his savings into this policy.

The business's records showed that Mr F had not wanted to take any risk with his money. In cases like this, we would usually tell a business to carry out a comparison with the average rate for one-year fixed-rate bonds. However Mr F had taken out his savings policy before the Bank of England started to compile this rate.

So as an alternative, we decided that it was reasonable for the business to compare what Mr F had received from the policy with what he would have got if the money had grown at the same rate as the Bank of England base rate.

image: ombudsman news issue 110

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.