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ombudsman news

issue 34

January 2004

case studies - single premium investment bonds

This selection illustrates some of the complaints we have dealt with recently about single premium investment bonds - including high income bonds, sometimes referred to as "precipice bonds".

34/7
customer invests in plan for "cautious investor" following mailing from firm - plan makes significant loss - whether firm's mailing incorrectly suggested plan was "low risk"

Mrs G was on the mailing list of an independent financial adviser (IFA). In February 2000, the IFA sent her a copy of its newsletter, promoting an "Extra Income & Growth Plan" described as being suitable for "the cautious investor". The plan was for a fixed term of three years and two months. It offered a choice of a tax-free and fixed income of 9.25% a year, or 30% growth over 3 years. The capital return was linked to the Dow Jones Eurostoxx 50 Index.

As a result of the mailing, Mrs G decided to invest in the plan. However, when it matured, she was shocked to find that she got back significantly less than the amount she had invested. When the IFA rejected her complaint about this, she came to us.

complaint upheld
The IFA said this had been an "execution-only" sale - no advice had been sought or given - so the suitability or otherwise of the investment advice was not an issue.

We looked at the documentation that the IFA had given Mrs G, in order to check what it said about the investment. The IFA's newsletter included full details of how the plan worked and how the capital return was calculated. It described the plan as "one of the best currently available" and said it would suit "the cautious investor who's looking for high income (or growth)". The IFA also said that the plan was "a good alternative to the Corporate Bond fund and, in our view, the best investment of its kind available to date".

The IFA had rejected Mrs G's complaint on the grounds that she had made her own decision to invest in this plan, based on the information presented to her. We accepted that the IFA had not intended to provide individual investment advice. However, we felt that an average person would interpret the statements in the firm's newsletter, and in the personalised letter, as confirmation that this was a low-risk investment and as advice to invest. In our view, the plan carried a higher level of risk than the IFA had suggested and than Mrs G had wished to take.

We established, on the balance of probabilities, that if she had not invested in this plan, Mrs G would have left the money in her building society account. The IFA therefore agreed to refund the amount that Mrs G had originally invested and to pay her interest, based on the building society's highest rate during the period that Mrs G had invested in the plan.

34/8
high income bond advertised in national press - "execution-only" sale - whether firm's material was misleading

Mr B sent off for further details of a "High Income Bond" after seeing the firm's advertisement in a national newspaper. The firm sent him a product brochure and a "key features" document, together with a covering letter. Mr B decided to invest in the bond, which offered a capital return linked to the NASDAQ-100 Index.

The bond had a three-year fixed term investment period. When the bond matured at the end of this period, Mr B was dismayed to find that his investment had resulted in a significant loss. He brought his complaint to us after complaining unsuccessfully to the firm.

complaint rejected
This had been an "execution-only" sale (in other words, the firm had not given Mr B any advice). And there was no question of the firm having specifically targeted Mr B as a suitable investor, since it had advertised the bond in a national newspaper.

The firm's covering letter had stated that the bond was "only suitable if the investor can afford an element of risk to the capital sum invested". It had also recommended that prospective investors should "seek investment advice if in doubt about the suitability of the investment".

The brochure stated that "while the track record of the NASDAQ-100 Index is excellent, it is no guarantee to future performance and therefore does not guarantee the return of all your original investment". The brochure also included an illustration showing several projected returns, including one that assumed the index had fallen by up to 50%.

We concluded that the firm had given Mr B full information about how the bond worked, and about the possible outcome of an investment in it. We did not consider that any of the material was misleading, and we noted that the firm had provided a clear statement that customers should seek investment advice if they were in any doubt about the bond's suitability. We therefore rejected the complaint.

34/9
customer invests in "low risk" plan after receiving firm's mailshot - whether product literature complied with the regulator's rules

In November 1999, a firm of independent financial advisers sent Mr C a mailshot about an "Extra Income & Growth Plan". The mailshot included a document setting out the key features of the plan and a substantial "newsletter".

The plan was for a fixed term of three years and two months and it offered 9 percent income or 28 percent growth, with a capital return linked to the Eurostoxx 50 Index.

Mr C invested in this plan as a result of the IFA's mailing. When his plan matured, Mr C found it had failed to grow or provide any income, and he got back less than the amount he had invested.

complaint upheld
In its newsletter, the IFA had described the product as being "a low-risk investment for growth investors". The IFA also quoted "independent consultants", who confirmed that the firm's risk assessment of the plan was "perfectly valid, based upon the investment conditions at the time".

We concluded that the IFA had made a clear and unambiguous statement that the plan was low-risk. However, given that this investment had a fixed term and that the return was linked to the Eurostoxx 50 Index, we did not agree that the plan was low-risk.

The IFA had a responsibility to ensure that its literature complied with the rules set by its then regulator, the Personal Investment Authority. Among other things, these rules stated that the information in any direct offer advertisement had to be "adequate and fair". We did not consider that the IFA had met its obligations in this case and we upheld Mr C's complaint. The IFA agreed to refund the amount Mr C had originally invested, and to pay an additional amount for the interest that Mr C would have been able to earn on that amount.

34/10
firm's mailing advertises plan with a "low downside risk" - customers made significant loss - whether the firm was right to classify the plan as "low risk"

Mr and Mrs J received a mailing from a firm of IFAs in June 2000. The mailing concerned an "Extra Income & Growth Plan" and consisted of a product brochure, a document setting out the plan's key features and a covering letter. This letter referred several times to the plan's "low downside risk". The plan had a fixed term of three years and two months. It offered a choice of 10.25% annual income or 31% growth, and its return was linked to the Eurostoxx 50 Index.

After reading the mailing, Mr and Mrs J went ahead with the investment. When the plan eventually matured, the couple found they had lost a significant amount of their capital.

complaint upheld
The mailing contained numerous references to the plan being "low risk". But a feature of the plan was that the capital return could fall by twice the amount of any corresponding reduction in the Eurostoxx 50 Index. So we did not agree that the plan could be classified as "low risk". We upheld the complaint and the firm agreed to pay the couple an amount equivalent to the capital they had invested, together with an additional amount for the interest they would have been able to earn on that amount.

Walter Merricks, chief ombudsman

ombudsman news issue 34 [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.