The Financial Ombudsman Service has ordered an adviser to reimburse their client after transferring their pension without carrying out the appropriate suitability checks.
Insight Financial Associates Limited had advised a client to transfer his personal pension to a self-invested personal pension and to then invest in overseas property scheme, named by the Fos as The Resort Group.
TRG is a luxury hotel chain based in Cape Verde that has attracted significant amounts of UK pensioner money in the past decade. The Fos found the client, whom it dubbed Mr H, had been unsuitably advised by Insight as the investment was beyond his appetite for risk.
Mr H first complained to Insight about its advice in 2018 after his new financial advisers told him it had been unsuitable. But Insight had rejected the complaint on the basis that it had not provided advice on the investment, only on the transfer into the Sipp.
However, the Fos referring to Financial Conduct Authority rules and guidance indicating it is not possible to distinguish between the two.
Rules that stood at the time of the transfer, later reiterated by the regulator in 2013, stated: "There are clear requirements under the FSA Principles and Conduct of Business rules and also in established case law for any adviser, in the giving of advice, to first take time to familiarise themselves with the wider investment and financial circumstances. Unless the adviser has done so, they will not be in a position to make recommendations on new products.”
The Fos said the sole reason for the transfer to the Sipp was to facilitate the investment. Given that the investment was unsuitable, the transfer was also unsuitable.
Mr H received advice from Insight in a suitability report dated September 8, 2009.
The advice was to transfer £66,318 of his personal pension and purchase a 45 per cent stake in an ‘off plan’ apartment on the understanding he would later purchase the remaining 55 per cent with a view to renting it out or that it could be sold at a profit.
Mr H’s investment in the development was later transferred to part ownership of another smaller apartment.
The Fos adjudicator felt the Cape Verde property was not a suitable investment because it pooled too much of Mr H’s investment into a single asset that was illiquid, potentially difficult to sell, and added significant extra cost.
It was also not covered by the same investor protections as the transferred pension.
The adjudicator said Insight had not collected enough information to give advice in 2009, as Insight’s fact find did not have any information about Mr H’s pension objectives, his cash flow and current assets or a completed risk questionnaire.
He did not agree with Insight that because Mr H had been introduced to it by a regulated mortgage broker, it did not need to collect this information.
Insight argued Mr H had undertaken his own due diligence, including visiting the property investment, and therefore ought to have been aware the investment was unsuitable when he switched to a different property and when the rental income failed to meet his original expectations.
While the Cape Verde hotels are operative, FTAdviser has previously reported that many of the investors are not receiving the returns they thought they had been promised, often falling short of funds for even the basic annual Sipp fees.
Insight rejected the adjudicator’s initial ruling of unsuitable advice, resulting in the case being passed on to Ombudsman Terry Connor for a final say.
Mr Connor said any due diligence carried out on the investment ought to have formed part of the advice Insight should have given Mr H.
The fact Mr H was unable to fund the purchase balance of the initial property and did not receive the rental income he originally anticipated underlined further that the investment was unsuitable, he said.
He said the myriad of risks posed by the single investment had not applied to Mr H's previous personal pension, which was held in standard assets like shares and bonds which could be sold readily on the stock market without much notice.
Crucially, he said the Cape Verde property was similar enough to a Ucis for the FCA’s rules on Ucis investments to apply: namely that it was high risk, illiquid and not subject to the usual protections that a standard investment would be, such as the Financial Services Compensation Scheme.
In 2010, the FCA’s predecessor, the Financial Services Authority, had issued an alert regarding Ucis, which outlined examples of suitable and unsuitable advice.
An example of suitable advice involved limiting a client's exposure to between 3 and 5 per cent of their retirement provisions to a Ucis after robust due diligence. Unsuitable advice on the other hand involved placing all of a client's assets into a single Ucis.
The alert was subsequent to the advice given to Mr H in 2009, but the ombudsman pointed out it was a reiteration of existing principles and therefore relevant to his case.
He said; “Given that most of the fact find completed at the time of advice was blank, it seems unlikely that Insight was able to make the determination that the Cape Verde investment was suitable.
“There were no details of Mr H's current assets or his monthly cash flow. Although the 'medium-high' risk box was selected, the questionnaire before this was left blank.
“But even had these been completed, there is nothing in the remaining evidence to suggest that the Cape Verde investment was right for Mr H.”
He added: “In my view, the example from the regulator guidance broadly matches Mr H's case.
“It is also not the case that because Mr H was aware of the costs and risks that this made the advice suitable.
“I therefore agree with our adjudicator and for the same reasons he set out in his assessment of this complaint, that Insight did not properly discharge its regulatory obligations to Mr H when transferring his funds to a Sipp and then investing in the Cape Verde property.
To compensate Mr H, Insight was ordered to compare the performance of Mr H's investment with that of the FTSE UK Private Investors Income Total Return Index, and pay out the difference plus interest.
Insight has also been told to take ownership of the illiquid investment by paying a commercial value acceptable to the pension provider.
If Insight is unable to purchase the investment the actual value should be assumed to be nil for the purpose of calculation. It should then pay an amount equal to five years of Sipp fees based on the current tariff, in addition to the compensation.
Chris Bryans, chartered financial planner and managing director of Complaints SOS Limited, which brought the complaint on behalf of the client, said:
"Both Mr H and Insight have paid the price – Insight finically and Mr H through the impact it has had on his health, as it has caused him a great deal of stress and anxiety.
"The Fos have a very difficult job to do and they have spent a great deal of time investigating all aspects of this case and given Insight Financial and Mr H every opportunity to present their case.
"The Fos has to be admired for continuing to work in these very difficult circumstances and for the professionalism and independence they bring to every complaint."
