FOS rules against adviser over Arch cru fund recommendation
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The Financial Ombudsman Service has upheld a complaint against an adviser who is deemed to have inappropriately placed a ‘low to medium risk’ client into the CF Arch cru investment portfolio.
In a decision document issued by the FOS, and seen by Money Marketing, the FOS says the client’s £100,000 investment exposed the capital to a risk greater than the client was prepared for.
The FOS says that the low to medium risk rating did not match the CF Arch cru investment portfolio given the funds’ 55 per cent exposure to private equity. According to the FOS a medium risk investment should hold no more than 5 per cent in private equity.
The FOS also questions the classification as “a low to medium risk investment” sitting “firmly within the cautious managed sector”, due to the inherent counterparty risk increasing risk to the fund. The fund sat in the IMA cautious managed sector.
The adviser has been asked to return the initial investment as well as a capital growth equivalent of 1 per cent more than Bank of England base rate compounded from the date of the investment to the date of the letter minus any withdrawals and any money recovered from the sale of the fund’s underlying investments.
The Arch-cru fund range was suspended due to liquidity concerns on March 13, 2009. According to Capita estimates, the investment portfolio has fallen 40 per cent from March 2009 to September 2009. Capita recently announced that it would begin distributing the suspended fund’s assets, which could take three to five years.
Regulatory Legal Partner Gareth Fatchett says: “This is a worrying development for firms who relied on the IMA cautious rating”
“This case sets a dangerous precedent for firms who risk profiled the portfolio fund as cautious. It would be naïve to think FOS will not use the methodology as a precedent”
The IMA says it cannot comment on individual funds. But it says to qualify to be in an IMA sector, funds must comply with the sector definitions and regulations set out by the FSA.
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Readers' comments (39)
Anonymous | 15 Dec 2009 3:03 pm
£100k in one fund? Reliance upon others to assess the risk is no defence. No idea what FSA regulations have to do with it.
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David | 15 Dec 2009 3:07 pm
Its a shame for the adviser (or his PI provideras they will face the brunt of the payment) but the FOS outcome on this is correct. The fund may have been marketed as low risk fund but with so much of it unknown, it was always higher risk than suggested. Thats not with hindsight either as plenty of advisers, myself included, were telling people not to use this fund as it wasnt what it appeared.
The IMA classification is not sufficient for advisers to use as a guide to risk. In some sectors you get a very large spread of risk between the funds.
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Bob Donaldson | 15 Dec 2009 3:09 pm
The long and short of it you should not trust what any company is saying and yes do your due diligence although it is sometimes exceptionally hard.
The problem with our industry is that the investment houses will always tell you what a wonderful product/investment it is but always remember where the buck stops. Having been caught in the splits debacle, rest assured I am the most cynical advisor out there when it comes to the companies telling you things and making promises.
I bet this advisor will now be the same!!!!
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Anonymous | 15 Dec 2009 3:12 pm
I do not know why this is suddenly headline news.
The FOS has been issuing similar decisions for years and getting away with it without any real recourse. I sure you have a barrister who writes about this regularly
I am hoping the conservatives stick to their pledge, close it down and set up a professional complaints organisation who understands regulation and risk.
David and George over to you....
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chris | 15 Dec 2009 3:16 pm
Surely an adviser should look at the asset allocation of the portfolio and would notice that 55% in private equity is by no means low to medium risk? It smacks of a lazy adviser to me.
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Incompetent Regulators Awards Team | 15 Dec 2009 3:16 pm
This is an edited story as if we look at the details we may find a different view. The reasons are simple, adjudicators and Ombudsmen at the FOS are mostly unqualified, not very bright and have little experience in the areas they adjudicate in. I know as I have dealt with many. What we need to know is what the adjudicator's experience is? That we will never know as they have been instrucetd by senior management not to disclose or answer these questions when asked. SECRECY IS THE NAME OF THE GAME.
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John Whipple | 15 Dec 2009 3:18 pm
So we cannot rely now upon the IMA definitions, the FSA authorising of firms and their products or the firms own educational material and marketing literature does not leave a lot of scope for us does it.
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Anonymous | 15 Dec 2009 3:23 pm
The important thing is for The FOS to have a consistency in terms of their rulings. I have previously experienced a client lose a case against a previous IFA where The FOS defended the IFAs right to rely on information provided by a fund manager as to the level of risk on a fund, but I have also seen them uphold a complaint against a firm run by a friend of mine where they were not permitted the same luxury.
The FSA must also stop using retrospective knowledge to condemn IFAs. This is particularly relevant with structured products. Two or three years ago the FSA issued a paper advising IFAs which areas needed to be covered with clients to satisfy the Regulator. Counterparty risk was not included, and yet the FSA are now strongly criticising IFAs in this area. If the FSA could not forsee the collapse of Lehman's when they were supposed to be regulating them, what chance for the IFA, except we are an easier target.
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john | 15 Dec 2009 3:29 pm
It doesn't do anyone any favours to complain about a specific judgement of this nature. To believe that having 55% in illiquid equities is low to medium risk is frankly unbelievable. The experience of the FOS adjudicators or the IMA sector categorisation notwithstanding.
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Phil Ham | 15 Dec 2009 3:29 pm
The guy clearly didn't do any DD at all on the fund, nor did he bother to diversify or follow a process of asset allocation outside of what the fund manager had told him was already taking place in the fund (55% private equity!)
He deserves the punishment, because he has not done his job properly.
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