An IFA has been instructed to compensate a couple their entire invested capital in a Keydata bond plus interest after an ombudsman found he "completely disregarded" their interests when advising them.
The unnamed adviser must pay the couple - "inexperienced" investors who were both five years from retirement when they purchased the bond in 2005 - a total of £60,000 plus four years' worth of interest, capped at £100,000, according to a provisional decision by the Financial Ombudsman Service (FOS).
The ombudsman ruled the adviser miscalculated his clients' attitude to risk and misled them on the security of the bond by overstating the involvement of "household name" HSBC.
The couple bought Keydata Secure Income Bond Issue 2, which invested in US life insurance contracts, but they stopped receiving income payments following a still-unclear "misappropriation" of funds.
However, the ombudsman concluded the couple should not have been invested in the product in the first place.
Keydata went into administration in June 2009 before defaulting five months later, losing thousands of investors money.
The compensation due to the couple reflects where, in the ombudsman's view, they would have been had they not taken up their adviser's recommendation. According to the FOS, this would most likely have been in a deposit account returning 4% annually.
The adviser has until the end of the month to submit further comment or evidence on the case, after which the FOS will publish its final decision.
The couple, aged 58 and 60, approached their IFA in early 2005 after coming into some money following the sale of a bed-and-breakfast business.
At the time, the adviser noted the clients both had a cautious attitude to risk and preferred to stay away from equities, but that they both wanted to receive a higher income than that available through a deposit account.
According to the ombudsman's notes, the couple made it clear that security of capital was their first priority and that they were, therefore, "no risk" investors.
But this differed from a letter sent by the adviser to his clients in 2005, which stated he believed they were prepared to take "limited risks" with their money.
The adviser recommended a £60,000 investment in the Keydata bond, but the clients raised concerns about the security of their investment and, particularly, the products' exposure to the insurance markets.
According to the ombudsman's provisional decision, the adviser then misled his clients about the involvement of HSBC in the structure of the bond, at one point telling them their capital would only be at risk if "all insurance companies with whom HSBC buy insurance contracts default on their obligations".
In reality, HSBC's involvement was limited to the holding, purchasing and selection of policies on behalf of the fund managers.
The ombudsman pointed out the clients only wanted to invest with household names like HSBC and believed, when they bought the Keydata bond, they were "buying into the reputation and strength" of the bank.
In conclusion, the ombudsman said it was clear the adviser should not have recommended the Keydata bond as suitable, and that he "completely disregarded the interests" of his "inexperienced" clients when doing so.
According to the FOS's notes, the clients also complained to the FSCS, but it rejected their claim for compensation partly because it did not believe statements made by Keydata regarding the levels of risk were false.
The ombudsman noted the clients were "doubly unfortunate" as some Keydata investors had been awarded compensation by the FSCS.
However, those individuals had invested in a Keydata product which, according to incorrect accompanying literature, could be placed in an investment ISA.
However, for the clients in this case, their investment was made entirely outside any ISA.
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