A client called Mr D met with Kingswood Financial Advisors’ adviser in June 2010 and said he wanted to use the money held in his pension to make a commercial property investment in the Caribbean.
At the time of the advice Mr D was aged 42 and married, self-employed with a gross monthly income of about £2,700 and had a personal pension plan with a fund value just over £21,000.
The transfer value of his pension pot was around £1,400 less than this, he owned other property apart from his home and held £5,000 on deposit jointly with his wife.
His attitude to risk was recorded as willing to accept the risk of a small loss to his pension.
The adviser explained he wouldn’t give Mr D any advice on the suitability of investing in commercial property but he did say this type of investment was only available using a Sipp.
Once the Sipp was in place, Mr D invested in Harlequin Property – an unregulated property scheme which has since been valued at nil for by the Financial Services Compensation Scheme for the purposes of compensation.
Claims paid out by the FSCS have risen to £375m, according to its annual report, with an increasing amount of payouts related to self-invested personal pensions.
The compensation paid to investors holding their pensions in Sipps went up by 35 per cent to £105m.
Kingswood argued Mr D had already received advice from another adviser about Harlequin and committed himself to buying the property by signing the relevant contracts.
Kingswood therefore argued it cannot be held responsible for the suitability of that investment.
The Financial Ombudsman Service ruled Kingswood had a duty to consider Mr D’s circumstances and give him suitable advice that considered both the suitability of the Sipp and the Harlequin investment.
In a final decision, ombudsman Doug Mansell said: “Kingswood was required to comply with the regulations. That includes knowing its client and giving suitable advice. It was also required to act in its client’s best interest. I don’t think Kingswood can avoid these obligations by limiting its role to only advising on the Sipp.
“The investment in Harlequin Property exposed Mr D’s pension funds to significant risk. It was an overseas property development. The way the investment was intended to work was not entirely clear. The rental income from a hotel room was to be paid to Mr D. But, the income depended on the success of the venture. I think this should have been clear to Kingswood when its adviser wrote to Mr D in June 2010.
“I am satisfied that the advice to transfer to the Sipp was unsuitable. The investment was too risky for Mr D. He was recorded as being prepared to take only a small loss of his money. I think that Kingswood should have advised Mr D against transferring to the Sipp; and also advised him not to invest in Harlequin.
“I am aware there’s an ongoing investigation by the Serious Fraud Office. The outcome of any proceedings arising from this is not yet known and may be some way off. I am not in a position to make any judgment about the conduct of those involved in the Harlequin investment. But I acknowledge that it may be relevant to how I determine fair compensation for Mr D.
“I can understand why Kingswood considers that other parties are responsible, either wholly or in part, for Mr D’s loss. I have considered that very carefully, along with more general issues of causation and foreseeability.
“No liability will arise for an adviser who has given suitable advice even if the investment is later fraudulently managed. But the position is different where the consumer would not have been in the investment in the first place had it not been for the unsuitable advice.
“In that situation it may be fair to assess compensation on our usual basis – aiming to put the consumer in the position he would have been in but for the unsuitable advice - notwithstanding any arguments around any fraud breaking the chain of causation.”
The ombudsman ruled Mr D should be compensated for his losses from investing in Harlequin Property “in full” plus £300 for the distress and inconvenience caused.
emma.hughes@ft.com
