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.
What the FSA said after its TCF visit (April 2009)
"[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.
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.
What the FOS adjudicator said (extracts, July 2011)
"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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