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.”