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Back to basics

“Low risk” is a fairly fundamental term used everyday in the financial sector. Advisers have to know what it means and apply it to their clients’ investment needs. The consequences for advisers who misinterpret or misrepresent the term can be dire.

So how is it then that the Financial Ombudsman Service and the Financial Services Compensation Scheme disagree on its definition?

Money Marketing revealed last week that the FSCS is not paying out on FOS decisions that call for consumer compensation over split caps, in cases where the provider has gone bust, because it rejects the FOS definition of “low risk”.

This begs the question; have advisers paid redress following FOS adjudications on complaints that should never have been upheld?

The FOS says future performance of a product in good times and bad should be taken into account when deciding its riskiness, whereas the FSCS simply says the term “low risk” describes an intention at the time a product is marketed.

Advisers caught up in the split-cap misselling scandal of a few years ago could be forgiven for taking a second look at their compensation payouts.

Fishburns Solicitors partner Andrew Davis says before 2001 zeros were widely accepted as low risk products and the FOS was wrong to uphold risk-based complaints on zeros bought in the years prior.

But he adds that if advisers had complaints upheld against them by the ombudsman they would have been bound by the decision and obliged to pay compensation to consumers.

He says: “FOS decisions are final – it’s unfair but it would be difficult to re-open all the previous cases based on this one outcome.”

So where does that leave advisers? And which definition of “low risk” should the industry be working off?

The FSCS told one claimant in a letter last month: “I must stress that the fact we have not found your claim eligible for compensation does not, in any way, mean that FOS was wrong in the conclusion it reached…although we take into account the view given by FOS we are not bound by their decision.”

Is it just me or does this make very little sense? If the FOS’ decision was right, surely the FSCS would follow its lead.

Compliance Consultant and former ombudsman Adam Samuel says problems of co-ordination between FOS and the FSCS and their predecessor organisations have existed since at least 1995 and probably before that.

He says he drew PIA’s attention to the problem 13 years ago but the regulator and the ICS, the FSCS’ ancestor, failed to address the problem.

He adds: “It is just another thing that brings the whole regulatory and complaints framework into disrepute with the public. It doesn’t help that the FSCS, the ultimate decision-maker, is almost certainly wrong.”


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