The Financial Ombudsman Service has ordered Armstrong Watson Financial Planning Limited to pay compensation to the estate of a customer it said was "mis-sold" an enterprise investment scheme.
Ombudsman Sarah Tozzi said the customer, Mrs B, was not given suitable advice when investing £200,000, and then a further £40,000, into the Octopus Eureka EIS.
Mrs B was advised by Armstrong Watson in 2010 to invest in the scheme, with the firm recommending the second investment a year later.
When Mrs B passed away in 2016, the estate was only able to withdraw £38,000 as the remainder of the investment was illiquid, though some additional payments were since made from the investment while the complaint was with the Fos.
The Fos’s investigator said Mrs B had the capacity to withstand capital losses, having a further £270,000 in cash, £100,000 in NS&I bonds and £630,000 in other investments, and that the OEIS did provide income tax relief and inheritance tax relief, which was in line with Mrs B’s objectives.
However, the Fos said it was not persuaded that the investment was in line with the investor’s attitude to risk.
The ombudsman said it was not satisfied that the high-risk nature of the investment had been explained to Mrs B, and there was nothing in a suitability report that said she would lose all her capital if the investment failed, rather it said that the investment would lead to an £80,000 saving on inheritance tax.
It was also not made clear that the funds would become illiquid and would be tied up in the investment for four years, if not longer.
“That was a material risk factor and relevant consideration, as it was clear that Mrs B wanted to retain access to her funds,” the Fos said.
“Further, I was not persuaded that it was made clear that the inheritance tax relief would be lost if Mrs B passed away within two years of investment.
“I was not persuaded that it was made clear to Mrs B that she was placing all of £200,000 at high risk,” Tozzi said.
A second suitability report from Armstrong Watson in 2011 noted that the OEIS was a high-risk strategy, but the Fos said it was not made clear to Mrs B that she stood to lose all her capital if the investment failed.
Armstrong Watson said the recommendations for Mrs B were suitable, that she chose to take higher risk to gain tax advantages and her daughter attended meetings with the firm with her.
Tozzi said the daughter testified that the level of risk exposure of the investments was not clear, and that the focus of these meetings was on tax breaks.
“On balance, I was not persuaded that potential tax reliefs were more important to Mrs B than the risk to her capital,” Tozzi said.
The ombudsman ordered Armstrong Watson to calculate the losses Mrs B occurred, using a fixed rate bond benchmark, and any withdrawal - income of other distribution paid out should be deducted from the fair value.
The Fos can make a money award required a business to pay compensation of up to £160,000, plus any interest or costs considered appropriate, and it ordered Armstrong Watson to pay the amount produced by the calculation up to £160,000.
sally.hickey@ft.com
