Adviser was right to class KSF as low-risk
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The Financial Ombudsman Service has advised an IFA facing a claim for recommending an offshore bond exposed to KSF Isle of Man that it was correct to class deposits with the bank as lowrisk investments.
The client, who had a lowrisk profile, invested in a Clerical Medical International offshore bond and a significant sum was deposited with Derbyshire Isle of Man. The bank was taken over by KSF IoM, which was put into administration in October 2008 and subsequently wound up.
In a letter to an IFA, seen by Money Marketing, an Ombudsman adjudicator says that leading credit rating agencies gave KSF a favourable rating until its administration and therefore deposits with the bank could not be viewed as anything other than low-risk investments des-pite media speculation at the time about the viability of Icelandic banks.
In the letter, the FOS also says that the IFA’s terms of business did not oblige him to continue to monitor the institutions holding the bond’s deposits, even if he was receiving trail commission, as his primary responsibility was in recommending the investment and not necessarily providing further advice.
The adjudicator is yet to issue its final decision on the case and is reviewing risk warnings given about protection provided by the Isle of Man’s depositor compensation scheme.
Foot Anstey associate Alan Hughes, who is representing the IFA, says: “This is very positive. The adjudicator seems to be saying that IFAs were entitled to rely on the credit ratings and that large deposits related to Icelandic institutions were compliant and suitable for a lowrisk investor and though they have subsequently suffered a loss, the IFA cannot be held responsible.”
Estimates suggest that nearly £400m was invested in KSF IoM through offshore bonds via a number of life offices.
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Readers' comments (8)
Peter Turner | 20 May 2010 9:57 am
I have a client IFA with exactly the same issue.
This is definitely good news, particularly as some PI insurers seem to be saying they would not cover such a claim.
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John Blackmore | 20 May 2010 10:05 am
“In the letter, the FOS also says that the IFA’s terms of business did not oblige him to continue to monitor the institutions holding the bond’s deposits, even if he was receiving trail commission, as his primary responsibility was in recommending the investment and not necessarily providing further advice.”
Good to see the FOS confirming this position – especially as some many IFA’s have argued the reverse.
I have no problem with the FSA changing this position from 2013 onwards but object to those who, presumably for reasons of self interest, attempt to impose liabilities on the rest of us where no such liability currently exists.
I do however doubt that the holier than thou brigade will take notice and that they will continue to argue that taking trail means that the adviser has a duty of care and other such nonsense. The adviser has a duty to follow the TOB issued and no more.
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Phil Castle | 20 May 2010 10:57 am
We have clearly seperated those consumers who WANT ongoing advice (and are willing to pay for it) and those who do NOT want ongoing advice/are unwilling to pay for it.
Clienst ongoing, Customers one off service (check your dictionary F-pack please)
Our Terms of Business clarify this (and after and argument with the FSA actually restate the wording in teh FSA handbook for all to see) and as the longstop exists in law (even if not in the handbook) and only the product sale is regulated (Financial Planning is NOT regulated), consumers need to be aware services are NOT regulated and even those that are, if the F-pack finally looses the longstop battle, the longstop MAY then apply from the date the advice was given
Whether the FOS choose to ignore it or not, remind consumers of it's existance as if they pay for ongoing professional advice and service, the longstop effectively does NOT apply as at each review the advice is reconfirmed and roles forward. If they do NOT pay for ongoing advice, we make it clear that the longstop should apply and we would expect the FOS to respect it, if they don't, then there will be a very big battle which would continue even IF they removed our FSA approval.
At our firm, if the consumer opts for our "Client Service" (ongoing) for which they pay a very nominal retainer, this forms a LEGAL contract for ongoing service between us and we then tie any trail to that ongoing service, offsetting it against the costs of providing the actual advice. If they fail to pay teh small retainer, then as the business was written WITHOUT any ongoing committment from us, that is our money OR they can transfer the agency to any other firm. Until they do, it remains ours.
All new business written is as per the FSAs intended Adviser Charging method as it is the going forward on adviser charging/customer agreed remuneration I completely agree with the FSA on, however I am TOTALLY against them applying it in any shape or form against ANY adviser/firm on business already written as many of these firms will have taken 3% initial plus 0.5% ongoing while the banks and tied sales forces as we all know were often taking 7% to 10% with nothing up front.
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Phil Castle | 20 May 2010 11:16 am
Oh yes, as to the "low risk/high risk" question. I am NOT convinced the FOS are actually thinking it through. Yes, it MAY be fair to have assessed the product as "low risk" (that is a matter of opinion I coudl debate, but will not), but the clients overall actions and the considerations of the adviser AND client with regard FSCS limits compared to the size of investment ARE relevant.
If the client for instance could have placed £32,500 (now £50K) on deposit in the UK obtaining FSCS protection, but instead placed it offshore without UK FSCS protection, was this decision documented? If the client placed £200k in the same scenario, was splitting across different institutions considered so as to enable the client to have seperate pools each covered by the FSCS? Was this documented.
We have several examples where a client had £200k to put to one side (note I say put to one side ratehr than invest), where we split the £50k in to four holdings, even when the limit was £32.5k rather than the 6.1 holdings which would have been needed for full FSCS protection. This was full documented with the client, not in writing as you can only write so much, but it can be HEARD on the MP3 file sound recording of the client meetings we have.
We also have clients who we reccomended invest in Icesave, the rate was higher but we did this knowing it was a little unstable, but as it was a small sum fully covered by the FSCS and the client could afford a little extra risk, it was a no brainer (he got his money back within a couple of months)
I am not criticising the adviser at all. just trying to highlight that in today's increasingley litigeous society, bearing in mind a client could (without your knowledge) record every word you say to them, instead of the B******s of a written "suitability report" which can bere NO resembelance to the spoken word which actually sold the client the idea to proceed, is it not time that we were encouraged to record all client meetings so that we'd only get hung for the bad advice we give and not for false accusations which some pen push at the FOS can then determin based on the smallest part of the job, i.e. the combination of client hearsay and confirmation of the sale (known as a suitabilility report) rather than the facts of what actually influenced the clients decision.
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Anonymous | 23 May 2010 4:15 pm
AT THE END OF THE DAY WE WERE ALL RIPPED OFF HERE COMPLETLEY BY A VERY DODGY GOVERMENT, SO MUCH SO THEY KNEW ABOUT THIS ABUSE ALL ALONG, SO MISLED ALL OF US THAT WILL NOW SUFFER, AS A RESULT OF SUCH GREEDY PEOPLE, FOR SURE !
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You Must Be Joking | 24 May 2010 11:37 am
A quick question for Phil Castle...
Take the following scenario:
Client with £7million, of which £4.5million he wishes to be maintained in cash, whilst also wishing to minimise immediate income tax liabilities.
How would you have approached this, given that an offshore bond is only way to achieve taxation objectives and, irrespective of this, there are not enough institutions to obtain cover under DCS?
Just curious
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Phil Castle | 24 May 2010 12:55 pm
To You must be joking - That is very hypothetical as it is massively larger than any case I have ever handled.
My initial thoughts would be rather than offshore bond (singular), offshore bonds (plural), ideally spread across more than one jurisdiction. I understand your dilema about "enough institutions" at 4.5million if he is single means 90 insitutions at £50k each, or 45 if single and when you get to that size, it is always going to be a problem that needs to be discussed with the client so they understand the inherent risks of any action.
There is also the issue of discussing the difference with the client between cash adn cash instruments.... Does the client need/want physical cash holdings or are cash instruments acceptable to him/her (i.e. some in a cash fund, again with varoius managers)
I've placed more than £50k with any one instituion regularly after discussing the pros and cons of sprading so wide it becomes unmanageable against the risk of failure. It is a matetr of opinion and attitude to risk (the clients), once you've discussed it and provided it's documented, it is their decision and risk and should not be your risk if it is their decision once they have the information to hand.
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You must be joking | 24 May 2010 1:16 pm
Thanks Phil
Unfortunately it wasn't a hypothetical situation for us and did infact happen a few years ago.
Client was adamant regarding both tax planning and deposit accounts (wanted to know the rate of return in advance) and we did split the money between a number of bond wrappers, although this was based more on charges than jurisdictions.
It still left us with a very limited choice of deposit accounts/institutions and obviously no protection whatsoever from any worthwhile DCS.
Having said that, client has already received a greater amount from the administrators than he would have under DCS anyway...
In reality, at higher levels, the DCS is worthless as it is only an advance of aything that would come from the administrators anyway.
And, of course, it was our esteemed former government (laughable) that decided to pay out over the DCS limits... rather rubbishing the value of the DCS in my opinion...
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