The Financial Ombudsman Service has overturned a decision in favour of a financial adviser who recommended his client to invest in the Keydata Defined Income Plan, despite the client having a risk profile commensurate with the underlying investment.
In a provisional decision that could have widespread implications for the hundreds of advisers facing Keydata claims, the ombudsman acknowledges that he is “departing substantially” from the conclusions reached by an adjudicator that had earlier found in favour of the adviser.
The adjudicator found the Keydata investment was suitable as it only represented 15 per cent of the investor’s pension fund and this suited the investor’s ‘balanced/adventurous’ attitude to risk.
However, the ombudsman said in the fresh decision there was “real doubt” given the “opaque nature” of the investments and the significant uncertainty around accurate valuation and liquidity whether such a fund would have been suitable for all “but the most experienced of retail investors”.
He added that given the investor’s age and his objectives that the risk profiling exercise was flawed and that the client should have been placed “more towards the lower end of balanced”.
In the decision, the ombudsman also flagged up the Financial Services Authority’s final notice to Norwich and Peterborough Building Society for failing to give its customers suitable advice in relation to the sale of Keydata life settlement products, which highlighted that Keydata products put all capital invested at potential risk.
In 2008, the investor was advised to invest around £86,624 in the Keydata plan through a self-invested personal pension and an Isa.
The adviser told the Fos that it had stated within its suitability letter that there were risks with the plan and that these were described in the plan literature that had been given to the investor.
For his part, the ombudsman said this was insufficient despite the plan literature “giving a host of examples in which investors could lose money”.
The ombudsman admits that the investor was in a position to take some investment risk, but said there was no evidence that he wanted to take “significant risk”.
The adviser business told the Fos that the Keydata investment failed because of the misappropriation of the funds, but the ombudsman said this is irrelevant as that occurred with another bond issued by SLS.
The ombudsman says that redress should be calculated by adding 1.5 per cent a year, compounded annually, from the date of investment until 13 November 2009, which is when Keydata defaulted to the initial investment. The business then has to add interest to this from 13 November 2009 at the rate of 2.5 per cent a year until the award is paid. Accordingly, the amount of interest paid needs to be reduced by £60,000 from April 2011 onwards.
A spokesperson for law firm Regulatory Legal said: “This is a very interesting approach as the deciding factor appears purely to be the brochure. This suggests all but a tiny number of cases will go for investor.”
