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ombudsman news

issue 8

August 2001

personal equity plans

Personal Equity Plans (PEPs) first became available in January 1987. They effectively came to an end on 5 April 1999, since no new subscriptions could be made after that date, although PEPs in existence on that date were allowed to continue. Since their introduction, PEPs have consistently been the source of a number of complaints to both the Investment Ombudsman and to the SFA Complaints Bureau.

The following case studies illustrate aspects of one of the most common causes for complaint - a change in the underlying investments in the PEP. Where such changes occur, if the new investments are not 'qualifying' investments (the types of investments permitted by the relevant regulations to be held in a PEP), then managers must either:

  • sell them within 30 calendar days of the date they became non-qualifying investments, in which case the proceeds can remain in the PEP; or
  • transfer them to the investor, who can keep them outside the PEP.

08/16

Mrs S held qualifying shares from company A within her PEP until the company was taken over. Investors then received non-qualifying shares in place of their previous holdings. Mrs S complained about the actions of the plan manager (regulated by IMRO - the Investment Management Regulatory Organisation), because he took the decision to sell these non-qualifying shares on behalf of PEP holders.

We were unable to find anything in the PEP terms and conditions that gave the PEP manager the authority to take this decision. The terms and conditions stated that the PEP manager would advise clients of the options available to them should there be a takeover, rights issue or other important event. Where new shares were not qualifying investments, the terms specified that investors could choose whether to:

  • sell the shares within 30 days of issue and reinvest the proceeds into qualifying investments or
  • to keep the shares, outside of the PEP.

Bearing this in mind, we considered it fair and reasonable to assume that, given the choice, Mrs S would have asked for the shares to be sold on the most advantageous date during the 30-day period. We therefore asked the firm to compensate her for her resulting financial loss.

08/17

Mr and Mrs V complained that at the time they purchased investment trust shares within their self-select PEP, the plan manager (regulated by SFA - the Securities and Futures Association) did not inform them that the company in which they were investing was due to be reconstructed. The result of the reconstruction was that the shares would no longer constitute qualifying investments for a PEP.

In response to the complaint, we sought the advice of the Inland Revenue, which confirmed that the PEP regulations did not oblige the plan manager to give an investor advance notification of an investment ceasing to qualify for inclusion in a PEP. This was a matter which might be included in the terms of the written agreement between the investor and the manager. There was, however, an implicit requirement for plan managers to monitor plans to ensure they continued to satisfy the qualifying criteria for PEPs.

In this particular case, while the firm accepted the Inland Revenue's views, we were still unable to achieve conciliation. We therefore advised Mr and Mrs V of their right to apply to the SFA's Consumer Arbitration Scheme.

Walter Merricks, chief ombudsman

ombudsman news issue 8 [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.