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High Court rejects asset manager judicial review of FOS complaint

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An asset management firm has lost an appeal against a compensation order from the Financial Ombudsman Service after claiming it did not provide personal recommendations.

The firm also claimed FOS’ decision was at odds with the finding of an FSA report.

Full Circle Asset management provides model portfolio discretionary investment services to clients.

Between October 2009 and May 2011, one its clients was Joanna King.

King was in her early 60s and retired, requiring an income of £1,200 per month. She invested £450,000 with Full Circle after completing an attitude to risk and loss document which recorded her as a medium risk investor.

King ended up losing £90,000 in her first 15 months with the firm.

As at 31 March 2010, the FOS noted that 35 per cent of the portfolio was in short-term investments and 45 per cent of the holdings were high risk. Some 20 per cent of the investments were in UK and China.

The Ombudsman decided the proportion of risky investments was excessive, hedging was insufficient, the portfolio was not set up to produce the kind of income King had asked for, and that information given to her had been too technical for her to understand.

Full Circle had also failed to define the terms “average risk investor” and “medium risk investor”.

In an Ombudsman ruling, the FOS decided King was entitled to compensation up to the £100,000 limit for investments, and that the amount of redress should depend on the difference between performance with Full Circle and the FTSE WMA Stock Market Income Total Return Index.

It also recommended any balance above that should be paid by the firm.

The Ombudsman concluded: “If the inherent risks had been clear to her she would not have proceeded with the investment.”

Full Circle’s challenge

Full Circle argued King was a medium risk investor, and that no objection could be taken to individual parts of the portfolio when, overall, it was medium risk.

The FSA asked an external firm to conduct a skilled persons review into Full Circle in November 2011 over “concerns that its main model portfolio was likely to be unsuitable for a significant proportion of its retail customers with balanced or medium risk appetite”.

The review concluded Full Circle’s model portfolio “exhibited on balance, a medium risk profile as per industry convention,” and the FSA agreed with this.

Full Circle also said it did not make a personal recommendation to invest in a product, but provided a discretionary investment management service instead.

But the Ombudsman dismissed this argument. It said: “Certainly, based on the way it set out its recommendations to Mrs K she could reasonably expect that it provided for her a personal recommendation.”

The Ombudsman added the FSA’s conclusions regarding the risk of the portfolio after the skilled person review was only one of the factors he had to take into account, and that overall suitability was the main concern.

It said: “My aim is not to risk rate Full Circle’s model portfolio, but to consider the suitability of the portfolio for Mrs King’s individual circumstances”.

The Ombudsman noted that King’s age meant she could not replace lost capital and that the sums invested were a “considerable proportion” of the investable assets she had.

No judicial review

The High Court has now upheld the Ombudsman’s decision against a judicial review challenge from Full Circle.

In his judgment released on Friday, Mr Justice Nicol says Full Circle’s challenge that the FOS had not given sufficient weight to the regulator’s view of the portolios as medium risk did not stand up to scrutiny.

Nicol said: “Far from this ground of challenge having merit, I would pay tribute to the Ombudsman for dealing comprehensively with the evidence and arguments which had been addressed to him. He explains his reasons fully.”

Law firm Foot Anstey’s financial services head Alan Hughes says: “The DFM has to engage properly with and understand the scope of duty that they assume in relation to a particular client – it appears here that the DFM limited their consideration to attempting to match the attitude to risk of the client with the right model portfolio. They did not realise that they had assumed a wider duty in relation to overall investment objectives.

“The DFM did not engage in enough detail with understanding the client’s attitude to risk and/or explaining to the client what the DFM meant by a ‘medium risk’ portfolio.

“For DFMs taking on “direct” clients, these are two important themes that they need to get to grips with, and ensure that their processes deal with these issues, in order to mitigate their own risks.”

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Comments

There are 15 comments at the moment, we would love to hear your opinion too.

  1. I think more than anything (and without considering the nuances and technicalities of what the adviser ‘sold’ or what/how it manages things), this case reiterates that:-

    1. A client who loses money (regardless of what she may have understood or what she was recommended to have, even if it fulfilled the objectives at that time) can complain.
    2. The Ombudsman can say that the adviser indemnifies the client and no argument or evidence to counter that is sufficient.
    3. Advisory firms face a lottery of outcomes from the Ombudsman and the individual nuances of over 200 of them and a range of experience and qualifications held, from none up to rather many. You will not find-out the pedigree either.
    4. When looking at business models, you MUST price-in the inevitability of complaints and findings against the adviser. The size of client is academic in some respects – the bigger their funds the more you should charge as the vulnerability is greater. The more clients you have, the more complaints you should expect. When markets fall in value, expect that there will be complaints from investors who are totally happy on the way up in that the strategy fulfills all their risk categorizations and requirements, oddly enough.
    5. However honest you are, diligent, ethical or professional, you will still see complaints. It might not even be the client – it could be a solicitor, an attorney, a family member (with eyes on their inheritance) a beneficiary under a Will for the deceased client, even a charity beneficiary challenging the winding-up of an account. It doesn’t matter how brilliant you have been for the client.
    6. The FOS will profit the complainant inequitably – as in this case. The Index makes no allowance for any fees despite the client signing-up to pay fees for such service. It will also allow interest at 8%pa despite no Court in the land having awarded this sum for years, recognizing that something more like 2-3% would be more suitable for savings.
    7. Any adviser taking-on a new client who has a track-record of complaints like this – watch-out and perhaps even encourage them to go elsewhere to look. That is the biggest loss this lady will suffer – not having the best advice for the rest of her life as a consequence of her actions. I expect had she stayed put she would now be doing very nicely thank you.
    8. Claims Management Companies are moving in to this space. Whilst they lack the sophistication of this arena, they will try. Expect more claims (but don’t simply bow-down to their demands – you do not have to let them have everything to pad-out their claims).
    9. Perhaps I shall have a black mark against my name by mentioning these things – though thankfully we haven’t had an eligible complaint for a long time… then I forgot – markets have been favourable…

    • I very much agree with you Philip. My biggest lesson learnt was at your point 7 as that was the 2nd person I recorded the client meeting and had I note, the SR would have been useless when trying to resolve/defend the complaint. It was resolved, but I should simply NOT have taken her on as a client. She had complained about her deceased husbands solicitor, hence introduced to me by her new solicitor. After her complaint handling solicitor with draw from pursuit of the complaint, she complained about him and then the adviser at her new firm too.
      Defend yourself from potential complaints as your good clients need you focused on THEM not dealing with complaints from chancers.
      This case does look a little odd however and there appear to have been flaws in the advice, so perhaps justified.

  2. The most important part of the decision seems to me to be this part: “The problems with this chain of reasoning [Full Circle’s appeal] begin with stage (i) [Full Circle’s assertion that Mrs King was a “medium risk investor”]. Part of the Ombudsman’s findings, as I have shown, was that the term ‘medium risk investor’ was too vague. It was, the Ombudsman found, incumbent on the Claimant to investigate more closely what Mrs King’s requirements were. It was necessary for the Ombudsman to do that, but it had also been necessary for the Claimant to do that if it was to discharge its responsibilities to her before making a personal recommendation to her.”

    If my business model involved shoehorning everyone into the same model portfolio after getting them to fill in a questionnaire, and I’d just read this judgment, I would be quaking in my boots.

    • Yep… agreed, that’s where I think the flaw was. The requirement is to Know your client….. not to do a fact find or a risk questionnaire which are both just tools to assist with ensuring you can meet the requirement to “KYC”.

  3. This is why as adviser you need three pillar approach a financial Plan particularly cash flow planning
    Risk Profile
    Above all give the client a clear indication on what can and cannot be achieved within the clients investment cycle.
    While no adviser can predict the future there is plenty of historical data that will show both the downside and upside of investing
    I am sure we can all learn from this case

  4. I think we are pretty much at the point where there is zero risk for investors ! its a win win scenario for them.

    Your investment grows, win !
    Your investment falls, you complain you win !

    What also strikes me is this case was written back in 2009 some 7/8 years ago……… we live and work in a very different world now, and you have to wonder how many files from this time would stack up to today’s scrutiny ?

  5. @D H

    That’s why firms need to change their legal form every few years – to take historic cases outside of the FOS jurisdiction.

  6. I think it points to one of the FCAs current worries , clients being put in model portfolios . I believe all clients are individuals , you may class them as a certain risk level but all have individual additional features that need to be taken into account .
    I can’t classify my clients in an arbitrary manner and shoe horn them accordingly . They are all individuals , risk profilers , model portfolios and DFM s must adjust within the accepted ratings to recognise an individuals circumstances . Those that don’t will face scrutiny and in my opinion don’t justify the fees they charge . Clients trust us based on an exchange of information which is individual to them and continually needs to be reviewed and re inforced .

  7. To man in black. So how does one change the legal status? Note the FCA rules expect any new firmware taking over an old firm’s clients expect to take on past liabilities?

  8. I like to believe every advisor works in good faith and with best efforts for their client. Good faith/best efforts are sadly no defence.

    Fundamental issue here being a lack of the appropriate tools to monitor suitability, both initially and on an ongoing basis. Challenge is not unique to Full Circle (or indeed to Mrs K) but the smarter firms have realised that this challenge can now be automated and solved quickly and painlessly (and typically at a lower cost than the £100k max compensation figure quoted in the story above).

    One imagines that such an investment will become strikingly attractive to many firms when stories like this become more visible. Ask around.

  9. I understand the maximum can award is 100K.

    If so, what weight does the recommendation to pay any excess have.

    Also unclear on the portfolio issue.

    Are they saying all money must be in a medium risk fund.

    Alternatively, does the member need to receive and understand the reasoning for every fund separately.

    The more time this takes, the higher the cost.

  10. I have been helping some Trustees with a situation which has many similarities to this.
    Their wealth manager believed that they could do literally whatever they liked with the Trust’s assets because they had a signed discretionary mandate with their in-house DFM, whose scope was so wide the very aged Trustees would not have understood it. The wealth manager then loaded them up with their own expensive, highly geared, non-FSA regulated, Cayman Islands based in-house UCIS as part of their mis-represented, supposedly risk aligned strategy. The UCIS were immediatly suspended and subsequently lost almost all their value. The performance of the non-UCIS portion was unimpressive by any measure.
    The WM / DFM completely failed to consider the suitability of the portfolio for the Trustees, which does seem to be the FOS’s main point in the Full Circle case.
    Discretionary mangers categorically do not have license to do as they please. They have a duty to do specifically what their clients expect of them, and they cannot possibly do that without a full and detailed understanding of their attitude to risk, capacity for loss and in all probablility far more detailed knowledge. The FCA and the courts should come down extremly hard on wealth mangers who abuse the trust of their clients and fail to manage the conflicts of interest.
    We understand that the FCA is currently considering investigating that particular Euston based WM and can only hope they do a thorough job and don’t have the wool pulled over their eyes.

  11. a 20% loss against a positive return from the FTSE over the same period suggests that whatever the merits of the case Full Circle did a pretty poor job. Can’t help but be reminded of the old quote that it is better to stay quiet and be thought an idiot than to speak up and remove any doubt – it seems misguided for Full Circle to have pursued this case and drawn so much attention to their shortcomings…

  12. Well you all have very valid reasoning, however
    Possibly the best way of handling any client is to down grade their ATR. In simple terms, high risk becomes medium Fisk, medium risk becomes low risk and low risk is low risk. There are of course categories in between these where fine tuning is possible. However it always better to revisit a client having made them money, rather than having lost it. I think the modern term is managing the clients expectation.

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