Any investor that takes advice is de facto not a sophisticated investor. Or at least that is the view one might take from a recent Financial Ombudsman Service decision.
The ombudsman found in favour of ‘Mrs B’, who had complained about advice she received from Lowes Financial Management to invest in two structured investments, which she said were unsuitable for her as she did not want to take any significant risk with her capital.
What is interesting about the case is the fact that the firm had stated in its defence that the client was ‘experienced’ enough to understand the investments. The ombudsman effectively suggested this was the same as claiming Mrs B was ‘sophisticated’, a view with which the ombudsman disagreed, in part because the client was seeking advice in the first place.
The decision states: “In my view, the evidence does not particularly support the view that Mrs B was an experienced or sophisticated investor.
“If she had been, she would presumably have been able to make her own arrangements and would not have needed to employ the services of an adviser.”
This is an important issue for some, especially if you have clients that you believe to meet this definition and might recommend the sort of unregulated schemes that you are no longer allowed to put in front of retail investors.
What is the technical definition of a sophisticated investor?
A quick call to the regulator and I was pointed to the relevant section in their handbook, which states to qualify an investor must “have a current certificate from an authorised person stating that [they] has enough knowledge to be able to understand the risks...”.
The handbook also said that a self-certified sophisticated investor is “an individual who has signed a statement in the form prescribed in part II of schedule 5 to the Financial Promotion Order”. This requires the individual to certify that they are:
• a member of a network or syndicate of business angels and have been so for at least the last six months;
• have made more than one investment in an unlisted company in the two years prior to that date;
• are working or have worked in the past two years in a professional capacity in private equity or a similar investment sector; or
• are currently or have been in the past two years a director of a company with an annual turnover of at least £1m.
According to the decision, Lowes did not provide enough evidence that Mrs B met the above definition. But that is not that the troubles me.
What gives me pause is the statement that follows, as outlined above, which seems to suggest any advised client cannot meet the definition.
It continues: “Either way, the adviser had an over-riding responsibility to make sure any recommendation made was suitable for her circumstances and requirements.”
Based on these comments, it could prove difficult to rely on a defence predicated on a client being classified as sophisticated.