The Financial Ombudsman Service has told Positive Solutions (Financial Services) Limited to offer less compensation than it originally offered.
A client, referred to as Mr J, was advised to transfer his pension to a new provider in May 2009.
He was advised to invest the fund built up to that date into a low risk cash fund and invest all his future contributions of £125 per month into a balanced fund.
Mr J was sent a letter by the pension provider in December 2014 which said that the overall value of his fund had fallen.
The letter said that the cash fund was not meant to be a long term investment.
At this point Mr J made a complaint to Positive Solutions about its advice.
The adviser said that the original intention had been for Mr J to invest in a 'distribution fund', as recorded in one of the suitability letters on a purely illustrative basis.
However, the adviser said Mr J had been concerned about risk due to the potential for market conditions to change at that time and that this could lead to losses so the recommendation was made in that context.
The firm therefore considered the advice to invest the transfer value in a cash fund with the regular premiums into a balanced fund was suitable at the time.
However a spokesman for Positive Solutions said this advice should have potentially been reviewed, given the improvement in the financial situation after the financial crisis.
Positive Solutions acknowledged it should possibly have told Mr J to switch out of these funds in the review meeting in May 2012.
But Positive Solutions argued Mr J ought to have been aware that he was in cash on receipt of his annual statements and that this fund wasn’t producing any return so he should have taken action to move his funds.
Ultimately it thought Mr J had needed to decide whether the absolute security of his funds was more important than the possibility of receiving an investment return, which would have necessitated taking some risk.
In order to resolve the matter, Positive Solutions made a compensation offer based on the assumption that Mr J had transferred to another fund in May 2012.
But Mr J didn’t accept the offer and asked the Financial Ombudsman Service to decide to rule more compensation should be awarded to him.
But in a final decision, ombudsman David Ashley actually awarded Mr J less compensation than Positive Solutions initially offered.
Mr Ashley said: “I agreed that the adviser had no motivation to invest Mr J in cash if there had been no concerns expressed about risk. And that it was likely that a conversation about risk took place.
“But on the other, if Mr J had wanted a very low risk approach then I thought that brought into doubt the suitability of the transfer advice itself.
“A transfer to invest in cash wouldn’t make financial sense given the returns needed to offset a market value adjustment (MVA) that had been applied on transfer.”
The ombudsman said Positive Solutions should assume that half the fund would have been invested in line with a medium risk approach and half in safer funds – as this was likely to have been suitable advice given Mr J’s circumstances at the time.
Positive Solutions then calculated the loss as £13,690 - less than its earlier compensation offer.
When told he would be getting less compensation than was first offered, Mr J responded to say that he was extremely disappointed with the whole process.
Mr Ashley said: “An adviser is obliged to take into account an individual’s willingness to accept risk when making their recommendations. However this is only part of the story. They are also required to assess their client’s capacity to take risk.
“With hindsight Mr J may now see that he would have made money if it had been invested in line with a medium risk profile.
“But if events had turned out differently and he’d lost a significant amount of this pension he could have been in a position where his income in retirement would be considerably less.
“At the time that the transfer was arranged there was considerable volatility in investment markets. A lot of investors were fearful of losing their money and there was a lot of uncertainty about how far equity prices might fall.
“So I don’t think it’s unreasonable to assume that a discussion about this volatility and the risks associated with it would likely have taken place.
Positive Solutions (Financial Services) Limited also has to pay Mr J £250 for the distress and inconvenience the matter has caused him.
emma.hughes@ft.com
