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Topics: FSA| Keydata| FSCS| FOS| TCF
An adviser has spoken of his anger and confusion after an adjudicator from the Financial Ombudsman Service (FOS) ruled he had given unsuitable advice to clients on insolvent investment firm Keydata - even though the FSA had previously deemed his recommendation appropriate.
In July, the adjudicator said advice given by Colin Stratton, director at Page & Page Financial Services, for a retired couple to invest £30,000 into a Keydata Defined Income Plan in March 2009 was "unsuitable".
But in what may be a unique case, it has emerged the FSA had looked at the same file during a treating customers fairly (TCF) supervision visit in April 2009, and found the advice "suitable for the clients' objectives and risk profile".
Keydata was declared insolvent in June 2009, putting £350m of customers' investments in doubt.
Investors have been invited to apply for compensation via the Financial Services Compensation Scheme (FSCS), but some are also revisiting the advice they were given and, where they believe it was unsuitable, are pursuing damages through the FOS.
In his July ruling, the FOS adjudicator recommended Page & Page compensate his clients the amount they originally invested plus interest. He also said the business should take ownership of the plans.
The FOS has a two-stage complaints procedure. If an adjudicator's recommendation is unacceptable to either the complainant or the firm, the matter can be referred to an ombudsman for a final decision.
Stratton has rejected the adjudicator's findings but expects the FOS's final decision, which will be legally binding on Page & Page, to take several months.
"I find it ludicrous that the FOS should uphold this complaint when the FSA - the financial services regulator - had reached a different conclusion," Stratton said.
"It is as though the FOS is reinventing the wheel on what is and isn't good advice, except it has the benefit of hindsight. When you give the advice, you don't have that benefit."
The FSA's TCF Supervision unit visited Hampshire-based Page & Page on 8 April 2009.
Stratton, who is facing three separate complaints related to his Keydata advice and said he recommended its products to 70 customers in total, said the FSA officer randomly selected ten files from his new business book, including that later ruled as unsuitable by the FOS.
In the report back to the firm on that case, the TCF assessor wrote: "The advice appears suitable for the clients' objectives and risk profile", although it was pointed out that it was unclear on the suitability report whether the couple had any personal debt at the time of advice, or which other types of investment were considered alongside Keydata.
Stratton said he later clarified both positions with his clients and sent out an updated suitability letter, which they approved.
However, last month the FOS adjudicator concluded the products were too risky for Stratton's clients. He said he did not believe, based on the suitability report, they would have "fully appreciated" the risks involved in the Keydata plans.
Stratton has informed the FOS of the findings of the FSA visit, and the Ombudsman service said it takes into account all evidence sent to it before making its recommendation.
However, a spokesperson said it was possible that an adjudicator who assesses suitability may look at different aspects of the case than an FSA inspector gauging TCF.
The FSA said it was unable to comment on specific cases.
In September last year, the FSCS said the marketing materials produced by Keydata to promote some its products did not comply with FSA rules.
"[The clients'] objective is to invest proceeds of tax free cash sum from vested pension together with some savings to generate additional income.
"The recommendation is to invest in ISAs first [£25,200]* and use the balance of £4,800 to invest in the Keydata product. The advice appears suitable for the clients' objectives and risk profile except it is not clear whether they should have repaid personal loans or kept cash in the bank for emergencies - this information was not recorded on file.
It's also unclear what other types of investment and providers were considered before recommending Keydata's products."
*A total of £30,000 was invested in Keydata. The FSA here refers to the total invested using the couple's ISA allowances across two tax years.
Action required:
Ascertain whether [the clients] had any personal debt at the time of advice and whether they had sufficient money readily available for emergencies. If so, make a record on file. Also record on file the research that was undertaken and the rationale for recommending the product and provider. This should also be reconfirmed to the clients.
If [the clients] should have received advice to repay personal loans and keep some funds available for emergencies, then the firm should take appropriate action to ensure they are not disadvantaged by the advice.
"Having looked at the evidence presented I am not persuaded that the risks associated with the investments were suitable for a 'cautious' investor (recorded as 35 points on the calculator used) or that the adviser sufficiently explained those risks.
"Both clients were retired and I am satisfied from the evidence available that they had an attitude to risk of medium/low/cautious and that the main priority had been to invest in income producing products. The adviser himself noted in the suitability letter (page 3) that:
‘You were attracted by the high income levels available from the relatively low risk investment. You are comfortable that the main risk to this investment is the potential failure of an insurance company not meeting its commitments. Given the broad spread of companies used and the likelihood of their failing, you are happy to commit to this contract.'
"In my opinion that would imply that the investment had much less risk than, for example, a normal stock market related investment and that, consequently, this would leave an investor to conclude that this was a safe investment and suitable for someone with a cautious/moderate attitude to risk.
"Although the clients had a range of other investments, I am not satisfied they understood that in order to achieve a high rate of income from this investment a higher degree of risk would be required than they would otherwise have envisaged.
"Despite the fact [the clients] had previously invested in equity based products I do not believe that they would have fully appreciated the risks involved in the Keydata plans.
"Consequently I do not believe that [the clients] would have invested in these products had they been fully aware of the risks attached to the plan and, therefore, I am of the opinion the advice they received was unsuitable."
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Sunk and complaining
When the Titanic sunk I expect every rivet had been passed as safe and sound - didn’t stop the whole boat sinking after what was really maladministration and poor advise to passengers that the boat was unsinkable? Seems very similar to anyone arguing the FSA should have stopped the banks doing things bankers should have known were unsafe for banks to do - The FSA is not there to hinder business and simply picks up the pieces after the repeated failings of the Financial Services Trade which historically looks as reliable as a Gaddafi's promises to tell the truth and do no harm!
Posted by: Roland Waters
Fairness
It never seems fair that an IFA is expected to have expert knowledge and infinite resources to conduct due diligence on providers. Especially when these providers are allowed to market products as low risk, which neither their regulator, the Advertising Standards Authority or the press with their massive resources were able to expose as wrong. However, it's obvious that the knowledge and experience of the FSA's and the Ombudsman's staff is miles short of the average IFA and will never provide compelling evidence in an argument for compensation.
Posted by: MarkG
Where is the public evidence that these were considered anything other than low risk in 2007? Hindsight is a wonderful thing...
There were many journalists and academics who sung the praises of Life Settlement Plans in 2007. The FSA said NOTHING publicly until February 2010. This was produced at the time and will have influenced advisers and consumers alike. Product review by Debbie Harrison, SeniorVisiting Fellow of the Pensions Institute at Cass Business School and contributor to the FinancialTimes The Secure Income Plan offers private investors attractive income and growth prospects via a relatively new asset class – the secondary market in US life assurance products – hitherto only available to institutional investors. Debbie Harrison is a SeniorVisiting Fellow at the Pensions Institute, Cass Business School, where she is a researcher and the co-author of four landmark pensions reports. Elsewhere she has published a wide range of UK and global retail and institutional finance books and research reports and has been a contributor to the FinancialTimes on pensions, investment, alternatives and expatriate issues for 20 years. In addition Debbie is a consultant to major financial institutions and also runs financial training courses for institutions and government departments, including the Department forWork and Pensions, HM Revenue & Customs, and the Office for National Statistics. She is a trustee of the Financial Inclusion Centre, a financial research charity, and she is an adviser to the DWP on pension reform. Keydata commissioned Debbie to write this product review.The firm provided technical assistance but she retained editorial control throughout
Posted by: Nameless
From the Ed
This is not a case of whether the FSA should have spotted something iffy with Keydata in advance (although perhaps it should), but about whether it is fair of the FOS to use the benefit of hindsight in this way. Obviously it is important that clients' cash is protected, but what about advisers?
Posted by: Ed
Hindsight
We should all feel sorrow for this fellow adviser, it is madness. Some of us preach to be whiter than white but just remember the next plan that goes wrong might be one you sold in good faith!
Posted by: RDR Ready
Hi Ed
Of course it is not right. The advice should be judged on the information available at the time. The logical conclusion of this is that people who buy term insurance should be able to sue their adviser if they don't die during the term. With the benefit of hindsight a term insurance is a stupid thing to recommend if the client doesn't die. The FSA should do it's job and poke around in providers a little more, who can cause serious consumer detriment. Leave advisers alone. If my firm went on a spree of bad advice and mis-management we could realistically only stuff up around 100 clients. How many have been disadvantaged by Keydata? Exactly - FSA SORT OUT YOUR PRIORITIES AND DO THE JOB YOU ARE THERE FOR. (That's regulation by the way not advice market micro-management)
Posted by: Chippy Minton
Risk Factors
Question: How many IFAs requested a copy of the prospectuses issued by Lifemark in 2007 and 2009? Answer: None These documents set out the relevant risk factors in great detail over 20 pages.
Posted by: Anon
2 wrongs don't make a right
The fact that the FSA 'passed' the advice as suitable does not deter from the FACT that it was NOT suitable to a person, or persons, who were not seeking high risk investment. All IFAs knew that Traded Life investments were only suitable for experienced investors prepared to accept the risk, so it matters not that the FSA rubber stamped it. All that proves is the FSA need to stand trial for not stopping Keydata years before all this mess kicked off. Clients come to the 'experts' believing they have their best interests at heart, when it is really the best commission that steers the IFA's recommendations.
Posted by: tonyinsussex
Life Settlements never were safe
I have been aware of Life Settlement funds for many years and never once was under any illusion that they were anything other than toxic. Many other people, far more knowledgeable than me, knew it too. If the FSA, or indeed any other regulator, really did approve them as low risk, that is something which could usefully be investigated. IFAs who sold them SHOULD have known better and if they did not then they let not only their clients down but also the reputation of the profession. Unlike many others, this WAS an entirely avoidable scandal. The FSA COULD and SHOULD have nipped it in the bud but were as usual asleep when they should have been proactive. High time Sants and his inept stooges paid up out of their own pockets for their failures.
Posted by: Michael Both
customer point of view
One crucial difference between a FSA 'treating customers fairly' review and a FOS adjudication is that, with the latter, the customer has the opportunity to put their point of view across. This may bring out additional detail that the FSA review may miss.
Posted by: Missold
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20-20 Hindsight
With the benefit of 20/20 Hindsight you can see that KeyData was actually a high risk investment. However prior to their collapse and assuming that the FSA are actually doing the job of regulating that they are so handsomely paid for, these investments were marketed as low risk, with losses that would occur in specific situations. Providing those potential losses were explained the advice should stand. These people that oversea us really are utter scumbags - the absolute lowest of the low. They fail to stand by what they say and change the rules to fit themselves.
Posted by: Chippy Minton