In October 2001 the client, referred to as Mr I, was in his mid-50s and recently widowed at the time the advice was given.
His annual income of approximately £3,050 comprised a widow’s pension of £2,200 and gross interest of £830 from £20,000 he held in two deposit accounts.
Given his personal allowance at the time would have been £4,535 a year, the adviser confirmed that Mr I was a non-taxpayer.
He should have been recommended a 'cautious' investment that provided a natural income which, due to his tax status, would be essentially tax-free.Kim DavenportAltogether, he had savings and investment worth approximately £147,000, which included £57,000 he held in a current account (conceivably a lump sum he received when his wife died), a Tessa worth £11,000, stocks and shares of £10,000, two Isas with a total value of £16,500, National Savings of £8,000 and a with-profit bond worth £25,000.
Mr I took a regular withdrawal of around £100 per month from this bond; otherwise, these investments were held for capital growth.
Other than using his annual Isa allowance and holding some stocks and shares, he had no significant investment experience until he took out a with-profits bond in 2000.
Essentially, when Mr I sought advice from Skipton he was willing to replace a known level of income for a potentially better return.
Skipton argued the adviser had fully explained the risks to Mr I, who was prepared to accept them, plus with-profits bonds are generally considered to be suitable for cautious investors.
Skipton added the tax implications of investing in the bonds were thoroughly explained to Mr I and the possible application of MVRs, presented by the bond was clearly detailed in the adviser’s financial report and the product literature.
Skipton argued he, therefore, made an informed choice given he already held a with-profits bond at the time
But the ombudsman ruled Mr I could ill-afford not to receive a return and the adviser ought to have realised this and shouldn’t have invested a further £40,000 in the two bonds.
If bonuses were reduced or stopped, he would be unable to switch out of the bonds without incurring a reduction in his capital either and Mr I had only held his previous bond for eight months, so it doesn’t follow that he knew how they operated.
Mr I surrendered one bond, referred to as with-profits bond A, in November 2004 for £17,800, less a MVR of £1,500 and an early surrender penalty of £450.
In October 2011, he surrendered the other bond, referred to as with-profits bond B, for £16,800 without penalty.
In a final decision the ombudsman ruled although Mr I was given risk warnings about the tax status of the bonds, the potential for a MVR to apply on surrender and future bonuses not being guaranteed, the bonds weren’t suitable for his circumstances and needs at the time.
Kim Davenport, ombudsman, said: "Mr I had more than 10 years before he became eligible for state pension and, in the meantime, he wanted to boost his income by £165 per month.
"As Mr I still had more than ten years before he was eligible for state pension, he could ill-afford to suffer / in the meantime.
"Furthermore, if economic conditions required the bond provider to reduce bonus rates and apply a MVR, Mr I would be in a position of seeing his capital eroded and being further penalised if he wished to surrender the bonds and invest his capital elsewhere to maintain his income need.
"I think he should have been recommended a ‘cautious’ investment that provided a natural income which, due to his tax status, would be essentially tax-free (and didn’t risk eroding his capital)."
Skipton was told to compare the performance of Mr I’s investments with that of a benchmark and pay the difference between the fair value and the actual value of the investments.
emma.hughes@ft.com
