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FSCS rejects watchdog over split-cap payouts

The Financial Services Compensation Scheme has over-ruled the Financial Ombudsman Service’s definition of “low risk” in relation to split-cap misselling and is refusing to pay out on cases upheld by the FOS.

Fishburns Solicitors partner Andrew Davis says the ruling exposes the unfairness of FOS misselling split-cap adjudications against advisers based on its “low risk” definition.

Split-cap provider BFS Investments had 400 complaints referred by consumers to the FOS before it went into administration in February 2006.

Sixty complaints had already been upheld by FOS adjudicators who believed the products should not have been described as low risk before the firm collapsed. These complaints were then passed to the FSCS.

In September this year, the FSCS sent letters to these claimants, stating it would not pay compensation to investors who had complaints upheld by the FOS because it believed the products were accurately described.

On one of the adjudications, the FOS said when assessing risk, firms “should take into account what would happen not just if things go well, but what would happen if things went badly”.

But the FSCS says describing something as low risk is “a statement of intention” and “a subsequent change in risk at a later date does not mean that the fund was misrepresented at the time of purchase”.

An FOS spokesman says the FSCS can overrule adjudicators but would not comment on whether it could overrule an ombudsman decision.

The FOS says: “The FSCS is an independent organisation with its own scheme rules for considering complaints. While the ombudsman service must consider what is fair and reasonable in an individual case, the FSCS acts like a liquidator and looks at the strict legal position. The conclusions of both organisations will often be the same, however, there will be some occasions when a different outcome is reached.”

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. Unfortunately FOS decisions are final. It is unfair but it would be difficult to reopen all the previous cases based on this one outcome.”

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