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ombudsman news

issue 80

October/November 2009

complaints involving bonds

The following case studies illustrate some of the complaints we have dealt with recently involving bonds. The complaints we see reveal that consumers are often unaware that the term "bond" does not denote one specific, clearly-defined product. There is no standard definition for the term and it is used in relation to a wide range of different products including those for deposits and with-profits savings.

80/06
consumers seeking regular income are advised to re-invest proceeds of a fixed-rate savings bond in a corporate bond fund

Mr and Mrs D consulted an adviser at their bank about re-investing the proceeds of a fixed-rate deposit-based bond that had recently matured. They had been very pleased with the income they received from their bond, so they said they would like to invest in "something similar".

They later told us that the adviser had said they would get "a much better return - with no risks" from a plan that invested in a corporate bond fund. As it was important to the couple to get as much income as possible from their money, they agreed to put £40,000 in the plan.

The couple soon found that the income they were getting was nowhere near the amount they felt they had been led to expect. They said they waited for a while "to see if things picked up" but eventually decided to cash-in the bond. They were then "dismayed" to find they got back a smaller sum than they had paid in.

Mr and Mrs D complained to the bank that they should never have been advised to "move away" from the type of bond they were used to. When the bank turned down their complaint, they came to us.

complaint upheld
We noted that, at the time of the advice, Mr and Mrs D already had some longer-term investments where the capital sum was not guaranteed and the income was variable. This might have indicated that they were experienced investors who would have understood the risks presented by the corporate bond fund. However, we discovered that the couple had not selected their existing investments themselves but had inherited them from Mrs D's brother, who had died several years earlier.

In view of their circumstances, and the fact that a significant proportion of their money was already tied up in medium- to longer-term investments, we concluded that the bank's advice had been inappropriate. Mr and Mrs D were relatively unsophisticated investors and we thought it unlikely that they would have accepted the adviser's recommendation if the risks had been explained to them.

We thought it most likely that, if they had been properly advised, they would have re-invested in a fixed-rate deposit-based bond. So we told the bank to calculate and pay redress that put the couple in the position they would have been in, if they had put their money in a fixed-rate deposit-based bond over the same period.

80/07
consumer complains that he received no return on the money he placed in a bond

Mr T complained to his bank when he discovered that he had not earned any interest on the bond it had advised him to invest in, five years earlier.

He said he would never have accepted the bank's advice if he had known he would not get back more than the amount he put in. He said the bank misled him and that, "at the very least", it should now pay him the interest he would have received, if he had left the money in his savings account.

The bank rejected Mr T's complaint. It said it had made it clear at the outset that although the amount he placed in the bond would be secure, any return on that sum would depend on stock market performance. As things had turned out, stock market performance had been particularly poor during the period in question.

Unhappy with this response, Mr T referred his complaint to us.

complaint not upheld
We examined the documents the bank had given Mr T, when it advised him to put his money in the bond. These clearly set out the possibility that the bond might not return more than the original sum he invested.

We then looked at whether the bank's advice to invest in this bond had been suitable, bearing in mind Mr T's circumstances at the time. We noted that he had a substantial sum in easily-accessible savings accounts elsewhere. He had invested previously in products that were very similar to the bond recommended by the bank. He had also invested in products that presented a potential risk to his capital as well as to returns.

Overall, it seemed to us that Mr T had not been given inappropriate advice. He had been properly informed of the nature of the bond - and of the risks involved. And he was in a position to invest over the longer-term, in the hope of achieving higher growth than if he left his money in a deposit account. We did not uphold his complaint.

80/08
bank unable to find any trace of the investment made by a customer in its fixed-rate savings bond

Mr A complained to his bank when staff at his local branch said they were "unable to find" the £12,000 that he had placed in a fixed-rate savings bond four years earlier. He had invested in the bond on the bank's recommendation, after visiting the branch for a financial review.

The bank did not dispute having recommended the savings bond to Mr A - and it accepted that he had a receipt showing that the money had been paid in at the local branch. However, it had no record of having opened a savings bond in Mr A's name and it was unable to say what had happened to the money.

Very unhappy with the situation, Mr A brought his complaint to us.

complaint upheld
Mr A said that after paying in the money he had not given it much thought. He had planned to leave it "untouched" for around five years and had assumed that it would simply be "rolled-over" into a new bond each year, unless he decided to withdraw the money or move it elsewhere.

It was only when his personal circumstances changed, and he reviewed his saving and investments, that he realised he had no paperwork relating to the savings bond, so queried this with his bank.

The bank's records showed that Mr A had visited the branch for a financial review and had said he had savings totalling £24,000. He had been advised to divide this equally between a "stocks and shares" investment plan and a one-year fixed-rate savings bond.

Mr A was able to produce two branch receipts, each for a cheque payment of £12,000. His bank statement showed that these two payments had been taken out of his current account.

The bank's records showed that one of the cheques had been used to open an investment plan. However, there was nothing to indicate what had happened to the rest of the money.

Because of the amount of time that had elapsed since Mr A paid in the money, it was not possible to construct an audit trail showing exactly what had happened to the money in question. However, as we were satisfied that Mr A had indeed given the bank this sum - and that he had never received the money back - we upheld his complaint.

We said that in addition to returning £12,000 to Mr A, the bank should pay him interest on this sum, backdated from the date when he paid the money in to his branch. We said the bank should also pay him £250 to reflect the upset and inconvenience he had been caused.

80/09
consumer complains she was wrongly advised to take out a long-term savings bond

After discussing her finances with her bank, Mrs K invested £80,000 in a five-year fixed-rate savings bond. Three years later she cashed-in the bond to help fund the purchase of a new house. When she discovered that she had incurred a substantial "early exit" charge, she complained to the bank.

Mrs K said she had made it clear at the outset that she was looking around for a new house and might need some of the money to help pay for it. She added that she was seriously ill, so should never have been advised to put her money in a bond that tied-up her money for five years.

The bank did not agree that its advice had been inappropriate. It said she had never mentioned that she was seriously ill, or that that she might need to put some of the money towards a new house. Unable to reach agreement with the bank, Mrs K referred her complaint to us.

complaint not upheld
We noted that the bond carried no risk to either the capital or the return of interest. It was not a regulated investment, so the bank had no regulatory duty to carry out a full "fact-find" to assess whether it was suitable for Mrs K's specific needs and circumstances.

The bank did, however, have a general duty to exercise reasonable skill and care. It had asked Mrs K a set of pre-defined questions about her circumstances before selling her the bond - and had a duty to take account of the answers she had given.

Both Mrs K and the bank employee she had consulted gave us their recollections of their meeting. We also asked the bank to send us the notes it had made of that meeting. These recorded that she had taken early retirement on ill-health grounds. However, there was nothing to suggest that she was seriously ill.

The bank had noted that Mrs K was intending to move house in the next few years - and that she planned to "downsize" to a smaller, cheaper property. She had over £250,000 in an "easy access" account with a different bank and there was no indication that some of the money subsequently placed in the bond might be needed to help fund her house purchase.

The bank's records stated that Mrs K had been told about the charge she would incur if she cashed-in the bond early - and we noted that the application form she had completed contained a prominent warning about the charge.

Taking all the evidence into account, we were not persuaded that - at the time she agreed to put £80,000 in the bond - she had intended to use any of that money to help finance her move. We thought it likely that her initial intention had been to "downsize" but that her plans had changed later.

We had considerable sympathy for Mrs K's health problems, which seemed to have deteriorated markedly during the period since she had taken out the bond.

However, we did not think that the bank could reasonably have known - at the time of the sale - that her state of health would make it unwise for her to tie-up her money for five years. We did not uphold the complaint.

80/10
consumers complain that building society's poor security procedures enabled an unknown person to cash-in their savings bond

Mr and Mrs C complained that when they visited their building society to withdraw money from their savings bond, they discovered that the entire proceeds - just over £600 - had been withdrawn. They were adamant that neither of them had taken the money.

Some months earlier their home had been burgled. They thought that personal papers stolen during the burglary might have helped someone get access to their money. But they said the building society had "clearly failed to put proper security measures in place, as it would otherwise have been impossible for an unauthorised person to withdraw the money".

After looking into the matter, the building society concluded that the couple had withdrawn the funds themselves and had simply forgotten that they had done so. Mr and Mrs C strongly disagreed and eventually brought the complaint to us.

complaint not upheld
We looked carefully at the building society's records. The paperwork relating to the withdrawal showed that the cashier had asked for proof of identity and had seen a passport for both Mr and Mrs C. Both of their signatures were on the withdrawal form - and these signatures matched those that the building society had on file, from the time when the couple first opened the account.

We agreed with the building society that the evidence suggested the couple had withdrawn the money themselves. However, we pointed out that it had not explained the situation to them quite as well as it might have done, as the couple clearly did not understand why their complaint had been turned down.

We explained to Mr and Mrs C what we had found in the building society's records about the disputed withdrawal. We also talked through with them in some detail the dates and circumstances of the few transactions that had been made on this account.

As a result we were able to jog their memories of events around the time of the disputed withdrawal.

They recalled that a couple of days after the date of the withdrawal, Mrs C's mother had suffered a stroke and been taken into hospital. And they then remembered - with some embarrassment - that they had indeed withdrawn the money themselves. They concluded that with all the domestic upheaval they had gone through in the following few weeks, they had simply forgotten all about it.

80/11
elderly consumer advised to put most of her savings in a long-term bond

Mrs V, who was in her 70s, invested a relatively modest sum in the two-year fixed-rate bond, offered by her bank. When the bond matured, she called in at her local bank branch and said she would like to re-invest the proceeds in another two-year bond.

She was told that this was unlikely to be the best option for her - and that she should make an appointment to discuss her finances with one of the advisers based at the branch. Mrs V agreed to this, and followed the bank's advice to put £60,000 in a five-year "guaranteed investment" bond.

Three years later, faced with the need for unexpected and costly building work on her house, Mrs V decided to cash-in the bond. She was dismayed to find she received less money back than she had put in. She complained that the adviser had told her the bond was "guaranteed" and was "likely to do much better" than the two-year fixed-rate bond she had previously invested in.

The bank turned down Mrs V's complaint. It said the return on her investment depended on stock market performance - and the sum she invested was only "secure" if she left it in the bond for the full five years. Mrs V then brought her complaint to us.

complaint upheld
We noted that Mrs V had been advised to invest a significant proportion of her total savings in the five-year bond. She told us that as "one never knows what is round the corner" and she was conscious that she was "getting on", she had been reluctant to tie-up her money for more than two years. She said she explained this to the adviser but he told her that investing in the longer-term bond would "make better sense - financially". She said the adviser had reassured her that she would have easy access to her money, in an emergency.

After examining all the evidence, we concluded that the bank had given Mrs V inappropriate advice. We thought it doubtful that she would have put her money in the five-year bond if she had realised the potential disadvantages, particularly if she needed to withdraw some or all of her money before the end of the five years.

We told the bank that the appropriate remedy in this case was to put Mrs V back in the position she would have been in, if it had not given her unsuitable advice. She had already made it clear that her original intention was to re-invest her money in a two-year fixed-rate bond. So we told the bank to compensate her accordingly. We said it should also pay her £200 for the distress and inconvenience it had caused her.

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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.