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FOS orders £30k compensation over unsuitably high Sipp commissions

The Financial Ombudsman Service has upheld a complaint against an advice firm for recommending a Sipp because it judged the initial commission to be unsuitably high.

In a decision published earlier this month, the FOS upheld a complaint against D M Cager for taking excessive commission payments from the first 12 months of payments into two clients’ Sipps following advice given in 2008 and has ordered the firm to pay around £30,000 to the clients.

One client was recommended to pay £4,000 a month into the policy and the second client to pay £2,000 a month into a separate policy. 

The clients complained the commission would have a disproportionately high impact on their pension funds at retirement, and that they were not provided with alternatives to paying commission.

The ombudsman ruled the policies were missold because the high initial charges were unsuitable for the clients. It said there were other products available, including stakeholder pensions, which did not incur high initial charges.

Ombudsman Roy Milne said: “I am not satisfied a pension with high initial charges was suitable because if the contributions stopped before the selected retirement age, the effect of those charges would be significant.”

D M Cager says the commission was not just for setting up the Sipp but was also to cover a range of other advice provided to the company making the pension contributions but the ombudsman said the client agreement did not mention payment for non-pension work using any commission paid by the pension.

The FOS has ordered D M Cager to pay the difference between the existing pensions and a stakeholder pension, using the WMA stock market income total return index to provide a value for the stakeholder pension.

It calculates that a total of £29,026 is due to the clients, plus £200 for distress and inconvenience.

D M Cager managing director Martin Dubber says the commission was clearly explained to and accepted by the clients, and a fee option was also offered.

He says: “It is not the role of the ombudsman, several years later, to decide if the figure was too high.”

He also argues the redress calculation method is unfair as the stakeholder pension value used by the FOS has no charges applied to it.

Dubber says: “There is no such product as a nil charge stakeholder pension and, given the sums involved in the case, the difference between calculating with and without charges is significant.

“To say we are disappointed with the decision would be a gross understatement, but the cost of applying for a judicial review would be punitive for a firm of our size.”


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There are 30 comments at the moment, we would love to hear your opinion too.

  1. Without getting into the rights and wrongs of the case that FOS has decided to make up a redress basis ie no charge stakeholder is a blatant abuse of power. FOS is legally required to put the client in the position they would have been in – absent advice – not to make money for the client at the expense of the adviser. FOS is clearly acting Ultra vires.

  2. “I am not satisfied a pension with high initial charges was suitable because if the contributions stopped before the selected retirement age, the effect of those charges would be significant.” Well that is a few Allied Dunbar and Abbey Life plans deemed inappropriate.

  3. How on earth could this firm possibly defend this humungous rip off? Compensation? I’m amazed the Regulator didn’t close them down or that the clients didn’t take out criminal proceedings. Obviously Mr Dubber is completely shameless and in this case he should thank his lucky stars that he has got off so lightly.

    The rest of us are busting our buns to show the public we are to be trusted to provide a decent, honest service and these firms louse it up for the rest of us. I guess this is an example of where we can actually bless the RDR.

    If this was commission, then it would appear that this was a life office product. A ‘proper’ investment product would have paid 3% of the premiums as they were contributed, so over a year £4k + £2k X 12 = £72k X 3% = £2,160. Say there was 4 years to go to December 2012 then the firm would have earned a total of £8,640 plus trail – way short of £30k and of course not ripped out at the start. Even then one could argue that even this is rather over the top.

    How suitable is it to have a SIPP with insured funds? What was the life office doing? Don’t they care or monitor this sort of thing. I can guess which of about 4 life offices this was. They too should be ashamed.

  4. @Simon Webster

    I disagree, the FOS are well within their rights on this one – ”Generally speaking, where we uphold a complaint our aim is to put the consumer in the position they would now be in – financially – if the business providing the financial service hadn’t got it wrong in the first place”

  5. I agree taking £30k commission is simply a rip off and you ‘reap what you sow’ doing things like this. If I was a client I would be seriously upset that someone could take this amount from me. Was it really explained or just on the illustration and hidden in the suitability.

  6. @PJ Botham
    I agree with your statement of principle but NOT your interpretation of the facts. The article states the compensation was based on roll up in an ShP with ZERO charges – no such contract exists and most charge a 1% AMC. This omission would have cost the firm to the advantage of the client and it was this use of a contract that did not exist to calculate redress that I protest.

  7. ?
    I think this is a bit of a attention grabbing head line !! “£30,000 COMMISSION” shock horror !!! (more bad press, all IFA’s are sharks)

    Is FOS’s point that they took this out of the 1st years premiums ?, the size of the payment (£30k)?, are FOS saying that they should have taken the fee over say a 5 or 10 year period ? why are they (FOS) comparing this to a stakeholder ?

    What was the term ??? 2yrs, 10, 25 ??

    If they had taken lower initial and built in trail it wouldn’t have taken that long to get well over the £30k (assuming reasonable growth and longer term say 7 yrs +)

    I do worry FOS making a decision on what “THEY” think is an acceptable charge ?

    Is there any thing wrong with getting your fees paid up front ? IE was this advice just transactional not ongoing ?
    We may only be viewing the dark side of the moon not the other side ?

  8. that’s a fair pojnt if that’s what they did but I suspect they mean no initial charges they must have assumed an amc, considering the compensation is basically just all the commission returned.

  9. I really really just can’t believe that some of you are trying to defend this. Am I so out of touch? On any measure £30k for arranging a fairly simple SIPP is just robbery. If the clients were investing £3 million then £30k could be justified.

    Banging on about the minutiae or the technicalities is absolutely beside the point. These people were sharks and deserved to be taken over the coals. The wonder is that it took so long and they were treated so lightly. (Bring back the birch!)

  10. these comments are worrying, £30k is unacceptable as initial, initial and trial whatever combination.

  11. We are conflating two issues here.

    The charge was clearly excessive and redress was due. BUT using a nil charge product as the yardstick for calculating redress could make a huge difference if applied to other cases – especially over the longer term.

    So while I have zero sympathy for the advisers I am very concerned by the precedent set by the remedy for their overcharging could have on the rest of us in terms of any settlements of our own, PI premiums and FOS levy etc.

  12. Ditto on rights and wrongs, reasonableness or not but a judicial review would not help anyway as it can only comment on procedural issues and abuses – NOT the case itself – a common misnomer I regret. RDR would help here I suppose in that a fee would be agreed and separately approved.

    I do wonder, however, if ‘commercial terms’ are outside of the Ombudsman’s jurisdiction upon which to rule – as they are also outside of the FCA’s regulatory responsibility and capacity….

  13. This story, as run by Money Marketing, is in no way an accurate reflection of this case which has been with the FOS for two years due to its complexities.

    The pension contributions were made by the employer, who was known to the adviser for several years prior to this transaction. They approached us to provide a range of services for them on an ongoing basis and it was agreed we would be remunerated for all of this work by the fee generated from the pension plans. The fee was fully explained to the clients, and alternative of an hourly rate offered, quotations were provided, a client agreement agreeing the fee signed, a suitability letter issued, and cooling off notices issued to the clients by the provider.

    For three years we carried out a range of services for the employer for which, as agreed, we made no charge whatsoever. In addition, no trail commission or ongoing fee was applied to the pensions.

    After three years, the relationship broke down and, a year subsequent to that, we received a complaint. The original ombudsman decision was in our favour as the ombudsman felt the fee was commensurate with the work that had been undertaken. The case was appealed and the second ombudsman decided that the additional work undertaken should not be taken into account and focussed solely on the pensions. He did, however, accept that the work had been carried out and advised we could now pursue the client for payment in respect of this work and that is ongoing.

    It is entirely wrong to suggest that we simply charged £30,000 to set up a SIPP as this article implies.

  14. Mark and Harry, I don’t think any of us would dispute the view that the level of commission taken appears to be far too high on the face of it, but it doesn’t make the outcome of the claim one which we should disregard, just because of this.

    Does this now potentially throw open the door to CMC’s asking whether people have paid too much commission when setting up their policy in the past?

    What constitutes fair remuneration in the eyes of the FOS? The least expensive contract on offer at the time (regardless of other cost factors)? The ‘standard’ rate for commission under regular pension plans in the 90’s and through to around 2005 (based upon term) was around 25% of first year’s premium I believe (are case officers at the FOS aware of that?).

    Based on this case, the commission could possibly have been around £18,000 under the above (yes, I know it is too much, but that’s how it was!).. Does this mean that commission levels under all older ‘standardised’ contracts were disproportionately high and thereby retrospectively fair game for a claim?

    I think that the FOS would do well do provide us with some clarity in respect of this matter, so that we can better understand what is/was required (not that we can change the past maybe, but a message needs to be sent before the FOS finds itself with a deluge of related complaints from the public on this matter (CMC’s are watching and will be aware!).

  15. So what would a fair rate of commission have been on these cases? Do we have enough information to go on, from this article? How much does the head of FOS earn and can I appeal against it?

  16. @ Steve D
    “Does this mean that commission levels under all older ‘standardised’ contracts were disproportionately high and thereby retrospectively fair game for a claim?”

    The short answer is ‘Yes’. That is precisely why we had the RDR. Commission disclosure was tried, but was manipulated. Commission appeared as far back as possible in the KFD and Illustration and was disguised as far as it was permissible.

    Commission rates were (and in cases where they are still permitted, still are) generally far too high. If advisers hadn’t merely relied on the KFD, but had spelled out exactly what was going to be paid and got the client to sign an acceptance at the time, I very much doubt whether in those circumstances an adviser would have anything to worry about.

    The problem (such as it is) is that those advisers who were less than clear about what they were trousering and merely relied on the KFD and Illustration may well have cause to worry – and I find it hard to sympathise. True the life offices also carry blame for not putting the commission at the start of page one in bold type and boxed.

  17. It appears that some peoples opinions (so they would like to think) should be take as fact !!

    The head line may not tell the whole story ? just a thought !! and by the way Elvis is now working in a chip shop in Brighton !

  18. I wonder how many of the commentators have actually read the FOS decision?

    Not many judging by the what’s being said…

  19. @grey area

    The facts of this case are outlined in my post at the top of this page which may have been missed by some as it was published out of synch with other comments, so never appeared as the last post.

  20. @Martin Dubber
    and that makes it terrifying! Even today post RDR we do work for a client across a range of plans and take the fee from the most appropriate. ie a £10,000 fee on a £1m investment pot of half collectives and half ISA its clearly far more sensible to take the fee out of the less tax effective collectives.

    The FSA and since FCA have repeatedly stated that they will not interfere on fee quantum and yet here FOS has AND in addition have calculated redress on basis outside their powers as the redress clearly exceeds any perceived client loss…

  21. @ Martin Dubber

    I have just read you post and must unreservedly offer my apology. Again I have been guilty of believing what I read. I would say to Paul Macmillan that this is not the standard of reporting expected from a well-regarded journal. If you do post articles and expect readers to comment, the very least you can do is to ensure the reporting is accurate and comprehensive.

    To say I feel foolish barely covers it and I only hope Mr Dubber and others don’t think too badly of me.
    As an aside I would say that it always a good idea to ensure you know where the skeletons are if you are dealing in relatively large sums or if you are not too sure of the characters with whom you are dealing. Like the man in the dentist chair being able to grab the Dentist by the short and curlies saying” Well we are not going to hurt each other – are we?”

  22. Thank you Grey Area, position sort of clarified. I have found and read the background. Still a few issues which seem to favour the clients view of events as opposed to the adviser’s (if it cannot be proved then it shouldn’t be assumed in my view, and yet assumptions do exist in the findings!), but generally speaking, my main concerns are ‘somewhat’ allayed.

  23. And when will the first claim against a CMC arise so that one-third or 40% of compensation as a fee is far too much…. especially when a free service via the FOS exists already.

    Maybe we need CMCs for the CMCs? They have ‘stolen’ billions form the deserving customers who they laud in their advertising material and who, curiously, they don’t encourage to approach the FOS themselves – or even offer a cheap, fee-based complaint letter writing guidance say to save the customer money…. odd that..

  24. I would like to comment now BUT it would be unfair to do so until reading the FOS decision.

    The one thing I will for now is that we record ALL client meetings so that we are hung for what we have done and not what someone with no evidence decides to accuse us of.

  25. Putting aside the rights and wrongs of the commission amount, I think HMRC would wish to look very closely at the practice of using pension fund monies to pay for other non related services. This is likely to be viewed as an unauthorised payment and lead to harsh sanctions both on the fund as well as professional adviser.

    Such HMRC involvement would result in greater sanctions and financial cost than the FOS judgement. All advisers need to be very careful around fee charging nowadays.

  26. @ Alan Read, that was one of the things I was going to say too about unauthorised payment charges. The serious error here is that the firm charged commission ABOVE it’s stated business terms and it appears as a result a deduction was made for other than pension advice reasons. We NEVER charge more than our tariff fees and often charge less and as Simon Webster said earlier, where and how we choose to DISCOUNT fees is another matter.

    I’ve read the FOS decision now and would recommend ALL advisers read it. There are flaws and errors by the FOS, but I can see why they came to their conclusion based on the published material. The problem is without a “fly on the wall” the whole thing comes down to one persons word against another’s and the FOS is unlike a court of law in that respect. The FOS ombudsman mentions a lack of “documentary evidence”, but confirms that a Client Agreement explaining fee options WAS issued when the consumer claimed they were NOT informed of this option, so the documentary evidence does exist on that claim if not on the commission/cost being used to meet non pension work, which means one person was lying, either the adviser or the consumer. If the Client agreement copy was obtaiend by the FOS from the consumer, then the consumer was lying when they said that they had not been informed of the case (maybe not consciously) and the onyl was it could be evidenced that the ption was explained OTHER than in the Client Agreement would be with a “fly on the wall”.
    That is why we have been recording ALL client meetings since about 2007 (using the basic software on a mobile phone) and is why the first ever complaint made about our advice was easily dismissed and rapidly went away (it came from a solicitor) once the client had made accusations we could disprove by playing the recording to the solicitor who then backed off very quickly and the complaint never went on to FOS as a result.

  27. @Philip Castle

    That is good practice but i can’t see many advisers employing the approach of recording meetings. Can i ask, do you make the clients aware that the meetings are being recorded? If you do then this solicitor is clearly an idiot.

    What worries me is that there seems to be a suggestion that should you issue a client with documents outlining an important piece of information such as advice costs and they then misplace it the FoS assume that the client didn’t receive it. Obviously this can be mitigated by having all important documentation signed by the client to say that they received it but this leads to additional paper work, time and filing that all contributes to the cost of advice.

  28. @Philip Milton

    Under the MOJ regulations, CMC’s are required to make potential clients aware of the existence of the Ombudsman Service and that this is free to use.

    In terms of complaint letter writing guidance, I am aware of a number of potential customers who have used our information pack to write their own complaints and accept that this is a potential business risk in providing such a comprehensive information pack.

    As for a fee based option, whilst I would personally be in favour of this – the reason that the vast majority of people were mis-sold PPI was a failure to spend time and effort managing their finances. As a generalisation this is the group least likely to see the value in spending up front fees for professional advice whether that is from an IFA in terms of their current needs or a CMC in terms of previous advice

  29. Didn’t the IFA declare what their fee/commission was prior to arranging the transaction, if so then whatever was agreed with the client should be none of FOS’s business. On the other hand if the IFA failed to disclose charges prior to arranging and advising on the transaction then clearly they would have a problem.

  30. Freddie Fudpucker 1st May 2014 at 4:15 pm

    First time I have ever known the FOS to make a decision in favour of a clent who has clearly not been given good service.

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