skip tocontent

ombudsman news

issue 48

August 2005

what makes an investor "experienced"-

Firms often try to defend complaints that their sale of an investment product was inappropriate by saying that the customer was "experienced". Sometimes, a firm may suggest that a customer’s ownership of shares demonstrates a knowledge of equities. Or a firm may say that a customer’s previous investment in a mortgage endowment policy "proves" they were comfortable with risk-based products.

We also sometimes find firms claiming that a customer is "experienced" because of their occupation. While it is true that a customer’s occupation may affect the likelihood that they will understand a particular investment, care should be taken not to make assumptions; there are always exceptions.

Having some former experience of investment does not necessarily mean that a customer is an expert in the subject, or that they understand the products they have taken out in the past. And it does not automatically mean that – in the customer’s present circumstances – a sophisticated approach or high-risk product is required or appropriate.

A customer’s investment experience is certainly one of the areas we look at when considering the complaints referred to us, and it can be relevant to our assessment of the customer’s overall circumstances. But we may sometimes decide that any experience is overridden by what was recorded at the time of the sale in the factfind or client questionnaire about the customer’s desired approach or their attitude to investment risk. For example, if a customer expresses the wish to adopt a cautious approach, then any recommendation the firm makes should be in line with this approach, regardless of the customer’s previous investment experience.

People have different needs at different times of their life. Financial firms have a duty to ensure that any product they recommend is suitable for the customer and that they have given the customer enough information to make an informed decision about that investment.

issue 48 index of case studies

  • 48/12 - firm says its customers’ ownership of windfall shares and mortgage endowment policies "proved" they were not averse to risk
  • 48/13 - firm says customer was an "experienced" investor because she had inherited a portfolio of shares
  • 48/14 - firm says customer was "experienced" investor because she was a trustee of a fund set up by her late husband
  • 48/15 - when investments decline in value, investors complain that advice has been unsuitable as they were "inexperienced" investors
  • 48/16 - customer with considerable investment experience complains that firm’s mailing misled him into making unsuitable investment

48/12
firm says its customers’ ownership of windfall shares and mortgage endowment policies "proved" they were not averse to risk

Mr and Mrs J wanted a greater return from their money than they were getting from their savings account, so they contacted an adviser recommended by a friend. On the adviser’s recommendation, the couple invested in a high-income stock market bond. When the bond matured, Mr and Mrs J were very disappointed to find that, although they had received a high income, their capital had been reduced. They said the firm had not warned them of the risk to their capital and they complained that the bond had not been suitable, as they were "cautious" investors.

The firm argued that Mr and Mrs J had not been averse to risk, since they held a number of mortgage endowment policies and a few shares. And it defended its sale of the bond by pointing out that the couple "had the ability and opportunity" to read the product documents which set out the potential risk to capital.

complaint upheld
The adviser had not completed a factfind at the time of the sale. However, in the letter he sent to Mr and Mrs J outlining his recommendation, he described the couple as "cautious investors". The bond was not suitable for them on that basis.

The fact that the adviser had sent the couple some documents about the bond did not make his recommendation any more suitable, or relieve the firm of the responsibility to give appropriate advice.

In our view, the couple’s mortgage endowment policies and shares did not indicate that they had investment experience or required a product carrying a high level of risk. The couple’s shares had come to them as a windfall following the demutualisation of their building society and they had received compensation from another financial firm for the mis-selling of one of their endowment policies. We upheld the complaint.

48/13
firm says customer was an "experienced" investor because she had inherited a portfolio of shares

Mrs B was widowed and in her late fifties. Some years earlier she had inherited a reasonably large portfolio of shares from her father. However, she had not done anything with the portfolio, which continued to be managed by her late father’s stockbroker.

Realising that she would need to supplement her income when she retired, as her occupational pension would be very small, Mrs B sought investment advice. She acted on the adviser’s recommendation that she should sell the share portfolio and invest in a portfolio of "less risky" bonds.

Some time later, when one of the bonds suffered a severe capital loss, she complained to the firm that its advice had been inappropriate, given that she was a "cautious" investor.

The firm rejected Mrs B’s complaint, arguing that she had not been disadvantaged since – overall – the recommended investments had met her requirements. It also said that her ownership of a portfolio of shares confirmed that she was not a "cautious investor" but an experienced one, who had a "higher tolerance of risk". Unhappy with the firm’s response, Mrs B came to us.

complaint upheld
The fact that Mrs B had inherited a portfolio of shares did not make her an experienced or knowledgeable investor. Nor did it make the firm’s advice appropriate. Mrs B had wanted to reduce the level of risk presented by her existing investments. The bonds did not meet that requirement. We upheld the complaint.

48/14
firm says customer was "experienced" investor because she was a trustee of a fund set up by her late husband


Mrs K, who had been a widow for many years, was one of the trustees of a family trust. This had been set up after her husband’s death to benefit their children. The firm advised the trustees and Mrs K later consulted it in her own right when she needed some personal investment advice.

However, Mrs K was very disappointed when the investments recommended to her by the firm failed to perform. She said that if the firm had explained the level of risk involved, she would never have put her money in these investments.

The firm rejected Mrs K’s complaint. It said that the fact that she had dealt with the trust’s assets showed that she was an "experienced" investor who was "prepared to accept the same level of risk personally".

complaint upheld
When Mrs K referred her complaint to us we noted that the firm had not completed a factfind at the time of the sale, so had no record of Mrs K’s attitude to risk. The brief letter it had sent her to confirm its recommendation merely described the products – it did not explain why it considered them suitable for Mrs K.

We found no evidence that Mrs K had been an active trustee. And on looking at her situation at the time of sale, we were satisfied that she was not an experienced investor and that the products recommended by the firm were not suitable for her. We therefore upheld her complaint.

48/15
when investments decline in value, investors complain that advice has been unsuitable as they were "inexperienced" investors

After Mr and Mrs D won £1m on the lottery, they were introduced to an adviser who arranged a portfolio of investments for them. Unfortunately the stock market fell and the portfolio declined in value.

The couple complained, saying that as they were "inexperienced" investors, the adviser should not have recommended any risk-based products. They thought that he should instead have arranged for their money to be left in savings accounts.

complaint rejected
Mr and Mrs D had not had money to invest in the past and were inexperienced investors. However, we were satisfied that the adviser had carried out a proper review of their circumstances and had explained the investment risk. We agreed with his assessment that Mr and Mrs D had been prepared to tolerate a low to medium level of risk when investing the money they had won. We therefore rejected the complaint.

48/16
customer with considerable investment experience complains that firm’s mailing misled him into making unsuitable investment

Mr T made an investment on a direct offer basis (in other words, he did not receive personal investment advice but invested after receiving a detailed mailing from the firm). Some while later he complained to the firm, saying that the investment product had turned out to be too risky for him. He also said that the firm’s letter that had accompanied the product literature had contained a factual error, which had misled him into investing.

The firm argued that the error in the covering letter was not material. It said that it had sent Mr T detailed – and correct – product information and that Mr T was an extremely experienced investor, well able to understand the nature of the investment he made.

complaint rejected
We concluded that the error in the firm’s letter did not mask the level of risk associated with the investment and that the letter had not influenced Mr T’s decision to invest. We also noted that Mr T had invested for many years on a direct offer basis. He had demonstrated a good understanding of risk-based products and his earlier investments had included a number of more adventurous products. We rejected his complaint.

Walter Merricks, chief ombudsman

ombudsman news issue 48 [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.