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FOS ruling on unsuitable Ucis advice called into question

The way in which the Financial Ombudsman Service judges advice to invest in unregulated collective investment schemes has been called into question after it upheld a complaint from a high-net-worth and sophisticated investor.

The FOS has seen a “steady increase” in Ucis complaints over the past six months and is currently reviewing around 800 complaints. It says the majority of complaints are upheld.

The FCA’s rules ban Ucis from being marketed to all but sophisticated and HNW investors. Sophisticated investors are defined as retail clients with “extensive investment experience and knowledge of complex instruments”, while HNW investors must have an annual income of more than £100,000 or investable net assets of more than £250,000.

But in a decision published this month, the FOS upheld a complaint against Kevin Neal Associates despite the investor appearing to meet the FCA’s Ucis promotion rules.

The FOS decision states that the investor had “a substantial income from royalties, personal assets worth around £500,000 and a property worth £1.5m”. He also signed a declaration stating that he was an experienced investor.

In 2010 the investor was advised to invest 75 per cent of his £180,000 pension fund into three Ucis schemes.

Kevin Neal Associates partner Kevin Neal says: “We did a full fact-find and risk assessment at the time and provided that to the FOS.

“The client had an income of £200,000 from his business, a diversified portfolio and had bought unlisted shares.”

But the FOS said it had not seen enough evidence that qualified the client as sophisticated or HNW, and the investments posed an unsuitable level of risk.

Ombudsman Adrian Hudson has ordered Kevin Neal Associates to purchase one of the investments, a £47,700 investment in forestry fund Quadris Environmental.

If the firm is unable to buy the investment, it must pay the client £57,432 – the value if the investment had been invested in the Apcims Income index – plus a further £4,348.

Apfa senior policy adviser Clare Griffiths says: “We hope and expect that if an adviser has met the FCA’s requirements, that would stand them in good stead if a case goes to the FOS. But we are aware of concerns among advisers that it is not always the case.”

Plan Money director Peter Chadborn says: “The FCA Ucis rules are clear but it is the FOS’s interpretation of them which advisers have to second-guess.”

The FOS declined to comment further on the case.


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There are 25 comments at the moment, we would love to hear your opinion too.

  1. I have some sympathy with the advice firm, but can’t help but wonder whether recommending that 75% of anyone’s pension fund should into UCIS is entirely appropriate. It would be interesting to see whether FOS would have found the same way if 75% had gone into “vanilla” funds and 25% had gone into 3 UCIS…

  2. goodness gracious 27th February 2014 at 1:53 pm

    Agree Simon, but will the firm go into liquidation so we all pay for their poor advice?

  3. I agree Simon, 75% is not acceptable in this case whereas there is a strong case for 25% being reasonable.

  4. I agree with Simon. It would be nice of the FOS and FCA could provide further clarity by answering Simon’s question…. Would the FOS have found the same way if 75% had gone into “vanilla” funds and 25% had gone into 3 UCIS…? Or 75% vanilla and 10 UCIS and so on……

  5. I agree with the other comments that 75% seems an awful lot to go into UCIS funds even for a “sophisticated” investor. We have for some time had a condition on our TOB’s that states that we will treat all clients as retail investor unless they pro-actively tell us otherwise. As yet, none have…

    I never personally fancies the whole Brazilian Teak thing, however I suspect that an institutional closed ended type approach to this type of investment would probably work pretty well for proper sophisticated investors.

    What interests me from all of these recent cases is the use of the APCIMS index. If I was a fund manager, I would probably put together some sort of APCIMS tracker range. At least then, the only thing that could go wrong with any investment re the FOS would be if you got the risk profile wrong…

  6. Incompetent Regulators 27th February 2014 at 3:04 pm

    So where does the client take SOME responsibility? On the face of it no, they can take as much risk as they want (driven by greed) and then still win a claim regardless.

    This Ombudsman in particular has come out with some very strange views over the years. To be unaccountable to ANYONE should be 100% against all human rights and especially when one can hide behind a government (qango) body.

  7. Perhaps 30 / 20 would have been more lovely?

  8. Seems something of a moral hazard

    Yes Mr Adviser give your highest risk portfolio possible – shoot the lights out I am a sophisticated investor

    If it goes up – thank you
    if it goes down – pop along to Fos and get APCIMs without charges plus % on top

    Why wouldnt you

  9. This has been happening for a few years now. It has got to the point where the FOS tail is wagging the investment dog and effectively setting standards that differ from the FCA rules. The rules are irrelevant if the FOS gold plate them.

    I suspect, and experience would suggest, that the starting assumption at the FOS is that any non-mainstream investment (and I don’t just mean the new FCA definition) is unsuitable for retail investors. One common point is that if it’s not regulated (and not covered by the FSCS) then that alone raises the risk above what would be suitable for the vast majority of clients. They have a point but it’s being taken way too far.

    The effect is that clients have an effective indemnity when placed in these investments. Investment goes up, you win. Investment goes down, you claim you didn’t understand it and it was too risky and you get your money back pus the growth of an index selected by the FOS.

    This is a far bigger issue than most people realise.

    • Julian Stevens 16th June 2017 at 6:19 pm

      It makes no difference whether the product is regulated or unregulated. It’s the ADVICE that’s regulated and therefore any losses incurred as a result of advice given by a regulated adviser can and frequently will end up with the FSCS.

      This, of course, raises yet again the perennial yet never answered question of why the FSA failed to identify and act upon these sales of patently unsuitable products, even to a client who was persuaded to classify himself as an experienced and sophisticated investor. The current review of the funding of the FSCS is just a mendacious distraction from the root cause of the problem.

  10. headbelowthe parapet 27th February 2014 at 6:03 pm

    This looks like a matter of:

    • ATR – the client was “balanced/risk aware” and was prepared to take above average risk, but the UCIS funds are (in the opinion of the FOS) of greater risk than this and of greater risk than the client was prepared to accept. The FOS also don’t think his other assets (which were substantial) have any bearing on the advice because there is no evidence of ‘holistic planning’;

    • Sophistication – in the opinion of the FOS the client doesn’t meet the PICS exemptions nor the COBS 4.12 rules, and the firm couldn’t (or didn’t) provide enough evidence of the clients sophistication (despite the client signing to say he was); and

    • Liquidity – the investor wanted the money to provide an on-going monthly income, but one of the UCIS funds was suspended. This was a crystallised pension in drawdown which was already providing £11k pa of income and the client wanted this income to continue.

    Hmmm, the main issues therefore are evidence (we really ought to record everything!) and liquidity.

    I might actually side with the FOS on this one, but only due to the liquidity issue – hands up who thinks that a UCIS which invests in Brazilian forestry might face a liquidity problem at some point during its lifetime…

    But, I do wish the FOS would explain their fixation on APCIMS funds as a benchmark and their dogged devotion to an 8% simple interest rate. That said it’s good to see that this particular judgment did include a comment regarding the deduction of income tax.

  11. When will the penny drop? FOS do not work to the FCA ‘Guidebook’ and they pay little attention to COBS. They admitted when asked if they referred to either of these that they dont even have copies of them! They have their own ‘ruiles’ and ‘guides’ and it is these standards they work to, right or wrong.

    As advisers, we obsess about and are brow beaten by compliance about how the FCA want us to work and operate but the truth is, unless your firm is unfortunate to require and FCA inspection or is being dishonest the standard of your work will ultimatley be judged by FOS.

    So, when you advise your clients and write your reaosns why letters, remeber this. A client will rarely thank you for a profit but will never forget you for a loss! Why anyone needs to use UCIS is beyond me. There are sufficient good quality authorised funds out there for all investors. I simply cannot understand why any adviser thinks he is being clever in sourcing and recommending these exotic schemes when their client will never thank them fo it.

  12. This is madness!!!!!

  13. I think that it is also relevant that although 75% of the pension fund may seem like a lot, this element of the client’s total portfolio, which hasn’t been spelt out above, may in fact represent the lower percentage of total assets that some of the commentators above would be happier with.
    One of the major flaws in how such complaints are considered is that FOS will only see 75% of the pension fund in high risk / illiquid holdings and will not take account of the client’s total financial position and entire portfolio.
    Any approach where you might for example put all the income generating (lower risk?) assets in ISAs and all the capital growth (high risk?) assets in pensions creating an overall balanced portfolio will be seen as two separate recommendations – and if the complaint is about one “half” of the advice then that “half” of the advice, seen in isolation from the full picture, will de faqto be completely unsuitable.
    And that’s a huge risk for good financial planners attempting to create excellent overall solutions.

  14. Good point Gill.

    Maybe if we could have some clear guidance from FOS then this woudl be of great benefit. They regularly do put case history on their website to be fair. We should encourage them to put more on, if not all.

    Maybe then we could work in the manner they really want. I suppose asking them to work with the FCA woudl be too much of an ask!

  15. headbelowthe parapet 28th February 2014 at 8:31 pm

    @ Gillian

    If you refer to the decision at:

    You’ll see that the ombudsman doesn’t think any UCIS can be categorised as low risk, nor does he believe that they are liquid investments suitable for drawdown in maximum payment.

    Difficult to argue against, but another major issue seems to be one of evidence – and that the firm has said that the advice was restricted to the pension fund.

    I wonder if you might know why the FOS seem to prefer the APCIMS indices as their benchmark of performance?

  16. OK. Everyone who has commented on this decision without reading it, own up and forever keep quiet on things of which you do not know.

    The decision is at It applies the rules in force at the time of the sale and in no way contradicts any FCA guidance. The promotion to be lawful had to be to a certificated sophisticated investor or the UCIS had to be previously determined to be suitable. The first requirement remains in place, the second exemption has gone under the FCA changes. The investment advice must then be suitable even if the promotion is lawful. The Ombudsman’s conclusions on suitability make perfect sense.

    Spreading bogus stories about FOS expressing a different view from the FCA guidance when it has done no such thing brings the IFA sector into disrepute and damages the reputation of the IFA brand.

  17. Adam, you are clearly quite irked by some, if not all of the above responses. As with many Blogs, the original string gets lost and the topic often morphs into another or broader discussion, as here I suspect. To claim the FCA and FOS express the same view at all times dismisses not just my own but other IFA’s anecdotal evidence.

    Our firm gained a new client two years ago who was at the time, in the middle of a complaint against the Halifax via FOS. As a result of the FOS ruling in our clients favour, we had the benefit of their reasoning in writing, a case handlers name and contact details. There were some judgements made for our client that we considered odd so took the opportunity to speak directly with the case handler who was I am very happy to say, very forthright, very clear and articulated very well her reasoning. She made her feeings about COBS and the FSA guidelines very clear!

    My own comments about the differeing views and a dismissal of following or having any copies to hand of COBS or any ofhte FSA guidance and that FOS ‘has its own set of rules’ is my anecdotal evidence (from my above ocnversation) which I will stand by. Your comments that we bring the IFA sector into disrepute ignores the evidence I’m afraid. There is nothing bogus here and how this damages the IFA brand, I’m unconvinced.

    What we all want surely, is a clear and coherent voice from both the FCA and FOS that they work together. I do think that early evidence of the FCA is that this is happening and some common sense is beginiing to shine through. The regulator should be there to protect the interests of both clients and advisers, creating a fair marketplace that we (clients & advisers) call all thrive in. FOS should simply be an extension of that and imbue everyone involved with confidence. We’re simply not there yet.

  18. In my defence, Lord Justice Samuel, I was making a wider point. And (objection overruled) I do have specific and not anecdotal or hearsay your honour, knowledge of specific cases where FOS has seen one recommendation for investments into a pension fund in complete isolation from the full picture of the total recommendation where the pension fund, on its own was higher risk than the client’s stated attitude to risk, but where the total portfolio was appropriately (in my random opinion, though I have been employed by lawyers as an expert witness) balanced by the residual portfolio which, seen on its own, could have been argued to be lower risk than the client stated.
    So … in my closing argument, I contend that my point remains valid – good financial planners creating comprehensive financial plans (including UCIS or not, obviously as long as they meet the relevant criteria for promotions and suitability) need to be aware of and address the risk that their “holistic” plan will be seen (and judged) as a mish-mash of jigsaw pieces when contemplated by FOS.

  19. Contractually anon 6th March 2014 at 7:47 am

    It is absolutely the case that an individual’s non pension investment holdings can lessen the risk of the pension holdings. However, when advisors provide advice restricted to pensions, how many record the customers other investments and include them in the pension risk assessment? Personal experience suggests that a significant proportion do not, and this complaint suggests that the firms record keeping in relation to the advice given did not demonstrate that other investment holdings were considered as part of the risk assessment… though happy to be corrected by anyone that has seen the advice records. Generally, using this as a learning point could be a valuable point for the industry.

    It looks to me that the FOS made the right decision based on the submission made to them.

    btw – 8% is the court rate of interest. This is unlikely to change at FOS until court rates do (there is a precedent, rates used to be 15%, and technically still are where a loss pre dates the relevant date, before Feb 93 from memory, though I’m sure someone will correct me)

  20. @Contractually anon
    A lower risk in one area cannot inherently “lessen the risk” of the pension holdings. If an assailant was holding a gun and a knife and chose to stab me, would I be any less dead if he chose instead to shoot me? I suspect what you mean is that if an individual has a diverse portfolio he could arguably afford to take greater risk in certain areas; or that if you sought to put all his investments on the efficient frontier the higher risk investment could potentially reduce the risk on the whole portfolio…but your explanation as written above would certainly fail at FOS.

  21. Matthew Rodhouse 10th March 2014 at 4:11 pm

    From 1 January 2014, COBS 4.12.9G seems to require the high net worth investor (as described here) to be a sophisticated investor as well. How to become a sophisticated investor is made clear in COBS 4.12.10G (2)(a) which states that investing in mainstream investments such as securities issued by listed companies, life policies and units in regulated collective investment schemes (other than qualified investor schemes) is generally unlikely to make an investor a sopisticated investor. So an investor can become a sophisticated investor by previous investment in real estate investment trusts, urits issued by special purpose vehicles pooling investment in listed or unlisted shares or bonds or EIS which are not UCIS.

  22. Mr Neal I urge you to complain to the complaints commissioner, let that government department beat up the FOS and the FCA. But don’t trust the FCA to pass on the complaint for you.

  23. “In 2010, Kevin Neal Associates Limited recommended that Mr C invest £180,000 of his pension fund (sic £193,000) in a portfolio of which 75% was invested in three unregulated collective investment schemes (UCIS), 20% in a high income investment fund and 5% in cash.

    At that time, Mr C had a pension fund of around £193,000 in an income drawdown arrangement from which he was taking the maximum permitted income of around £11,000 gross a year, having taken the tax-free cash in April 2009.

    Kevin Neal Associates Limited has said that the amount invested, £180,000, represented only a small proportion of Mr C’s overall wealth. While Mr C had wealth outside of his pension fund, Kevin Neal Associates Limited provided advice on the investment of his pension fund only rather than providing any holistic planning. It gave no indication in its report that it would take into account the risk profile of any other assets. Indeed, Kevin Neal Associates Limited said that its advice was restricted to the investment of the pension fund in the SIPP.

    I am not persuaded that Kevin Neal Associates Limited can now argue that the risk to which it exposed the pension fund was intentionally higher than
    Mr C was willing to accept because of his other assets”

    How many of you would endorse this recommendation?

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