Openwork clashes with ombudsman over risk profile

Openwork clashes with ombudsman over risk profile

Openwork has been told to refund a client who invested in a fund which was too high-risk for their needs

The client, referred to as Mr M, complained to the Financial Ombudsman Service, which upheld the complaint.

Mr M had been advised in 2005 to invest capital sums in an Isa and an investment bond, each investing in the Multi-Manager Protected Profits fund.

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But the client, who was represented by a claims management company, said the fund was newly created so had no track record and had been advised to commit too much of his savings to long-term equity-based investments for someone who was recently retired.

Kim Davenport, an ombudsman at the Fos, agreed, highlighting the fact Mr M had no previous experience of risk-based investing and all the shares he held came from privatisation issues.

He said: "As the questionnaire Mr M completed isn’t available to me, I don’t know what answers he provided that gave him this risk profile. As it was, Mr M felt his approach to investment should be more cautious.

"And, based on the evidence of his personal and financial circumstances, I wouldn’t accept that he should have been regarded as anything more than a cautious investor, if he considered himself an investor at all.

"In my view, Mr M should have invested much less than 84 per cent of his total savings for income in a fund that invested heavily in equities."

Mr Davenport also took issue with the claim the fund was less risky because it had a safeguard preventing the selling price from falling below 80 per cent of its highest ever selling price.

He said: "The ongoing risk to Mr M’s money is the same - the ‘protected price’ just limits the effects of capital loss precisely because the fund invests largely in assets that, by their nature, are volatile."

At the time the advice was received, in October 2005, Mr M was in his late 50s and had retired on an annual pension of around £25,000, which, after his regular outgoings, gave him a disposable income of almost £200 a month.

Mr M held savings on deposit of £116,000, which included his pension lump sum and privatisation shares worth approximately £5,000.

The adviser recorded Mr M wanted additional income of £400 a month. So he recommended him to invest £7,000 in an equity Isa and £90,000 in an investment bond, and to take monthly capital withdrawals from each investment of 5 per cent a year.

Openwork disputed the complaint, saying Mr M did understand that the investment could fall by £16,500 and that he was prepared to accept such a risk.

A spokesman for Openwork also said a moderately cautious investor would be prepared to take more risk than this.

But Mr Davenport disagreed and said Openwork should compare the performance of Mr M’s investment with that of the FTSE UK Private Investors Income Total Return index and pay the difference between the fair value and the actual value of the investment plus 8 per cent interest.