Mapping the next advice complaint danger zones


Advisers have been warned to brace themselves for a spike in complaints related to tax avoidance, suspended property funds and Sipp fraud as the compensation culture among investors continues to take hold.

HM Revenue & Customs has embarked on a crackdown on film partnership investments and the FCA has recently issued warnings about dealing with unauthorised introducers.

Commentators have warned advisers could be vulnerable to complaints, as claims management firms are known to be drumming up business in a number of areas.

Money Marketing has examined the regulatory risks advisers need to be aware of, the likely causes of complaints and the potential trigger points for Financial Services Compensation Scheme levies.

‘Tip of the iceberg’

Tax avoidance schemes, and in particular film partnerships, have been highlighted as a key risk area for advisers in the coming 12 months.

Following a recent high-profile First Tier tax tribunal case involving Ingenious Media and HMRC, 220 clients have reportedly filed a lawsuit against Royal Bank of Scotland-owned private bank Coutts, UBS and other advisers relating to a more than £100m bill in back taxes and interest from HMRC.

There are also new Government proposals to penalise those involved in facilitating tax avoidance schemes – including advisers. A consultation published last month includes advisers within its proposed definition of a tax avoidance “enabler” because it says they can benefit through fees and commissions by marketing avoidance schemes. It favours a model where a penalty of either 100 per cent of the tax evaded, or £3,000, whichever is higher, is handed to the enabler.

EY senior adviser Malcolm Kerr considers the issues that have so far emerged with film finance are just “the tip of the iceberg”.

He says: “Film finance, on the face of it, was not supposed to be risky. The risk was that HMRC might not approve the arrangements. When these things were being sold, the FCA was comfortable with it. Then there was the suggestion that it was all about the avoidance and not much about making movies and it turned out to be quite high risk.”

Regulatory consultant David Severn considers tax avoidance schemes will only be of concern to a minority of high-net-worth clients, however he does agree there are risks with these investments and that both advisers and clients should not “be too greedy”.

If I was a client, I would want to be more than 100 per cent assured my adviser had got it right with the tax avoidance scheme

He says: “[Advisers] have got to be very cautious in this area because if you get a tax scheme wrong, not only does it lose the client any supposed tax benefits they were going to get from it but there is also the hassle of an investigation by HMRC and the possibility of financial penalties.

“If I was a client, I would want to be more than 100 per cent assured that my adviser had got it right with the tax avoidance scheme and it would not be something that would land me in trouble in the long term.”

4 Pump Court barrister Peter Hamilton says unless a client has been explicitly warned the tax avoidance scheme may fail, there is a danger to advisers.

He says: “It may fail for one of two reasons – first, if it is technically challengeable, which is what HMRC will start by saying and, secondly, that it is very complicated to do it correctly and the way the scheme was run may have resulted in it not being effective. That is particularly the case around collective investment schemes and that was one of the areas these film schemes operated.”

Property funds fallout

Another key risk identified for advisers over the next 12 months relates to the suspension of property funds after the Brexit vote.

Law firm DWF partner Harriet Quiney says in the past when property funds have been gated, customers have complained they were not informed the fund was illiquid.

In the aftermath of the referendum seven asset managers’ property funds were suspended: Aviva Investors, Aberdeen Asset Management, Henderson Global Investors, Columbia Threadneedle, Standard Life Investments, Canada Life and M&G Investments.

FCA chief executive Andrew Bailey has reportedly suggested the design of property funds needs to be reviewed in the wake of the suspensions.

While several firms have now announced plans to reopen their funds, more than £18bn of assets were frozen after the vote.

Quiney hopes advisers have learned from the issues experienced with property funds following the financial crisis in 2008/09.

She says: “There was a huge problem with property funds in 2008/09, lots of them went bust and a lot of people complained. There were lots of complaints by investors that they could not get their money out and they hadn’t understood. Having gone through that experience seven or eight years ago, the hope is advisers are more aware with property funds that there are liquidity problems.

“The risk is as an adviser, if you have not explained [to the client] that they might not be able to get their money out when they want to, they will be quite annoyed and there will be misselling claims. If people have not learned from 2008/09 they might not have emphasised this specific risk.”

Kerr considers it likely some clients would have invested in property funds without being aware they may not be able to get their money out in the future.

He says: “[Suspension] is such a rare occurrence that it may slip the mind of the adviser that it needs to be pointed out.

However, he adds: “It is only a temporary suspension so it is not as though there is actual harm done, but it is just one more thing the FCA and the Financial Ombudsman Service would be concerned about.”

There is also a risk clients can panic about their investments when faced with a turbulent and unsettling period, such as Brexit. Severn says: “If they lose their nerve then the adviser ought to be steering them into something where they will not start having kittens the moment something goes wrong.

“It is also part of the ongoing service that when something like Brexit happens, a good adviser who has an ongoing relationship with clients ought to be saying don’t panic, let things settle, rather than go straight for redeeming funds.”

Sipps and introducers

Quiney highlights a potential problem with Sipps in relation to introducers. She says: “We are becoming increasingly aware of people flogging these investments and [clients] getting cash back on their investments.”

She says advisers need to be aware of patterns in the advice their clients are seeking.

She says: “The advjser might see one person come through the door wanting to do something odd and they say it’s not a good idea but what happens if you have 20 or 30 or 40 people come through the door? We have come across one case where we know one of the [clients] was given an incentive of over £5,000 and told not to tell their IFA about it.”

Quiney believes this could be a particular danger for networks.

She says: “Specific appointed representatives might be targeted and might not be forthcoming about what is going on, and covering up to the network they are doing all of this high commission business.”

Severn says: “This is really all about networks having a firm grip and understanding of what their ARs are doing. If the ARs are getting into this dodgy area then, from a point of view of self-interest, the network principal ought to be clamping down on them.”

Claims against Sipp administrators are also starting to emerge, according to Quiney, despite these companies generally not being authorised to give advice.

Pivoting money

Crowdfunding has also been raised as a risk area, given that not all kinds of these investments are regulated. Currently, the FCA regulates peer-to-peer lending and investment-based crowdfunding but does not oversee donation-based crowdfunding or rewards-based crowdfunding.

Kerr says: “The problem with crowdfunding arrangements is the people arranging the money can pivot. So you think you are raising money for XYZ but, as the process goes through, the people who have raised the money can think that is not necessarily the right thing to do and can use the money for something completely different.

“I would be surprised if advisers are recommending that people invest in crowdfunding. If you had a sophisticated investor who understood the risks then that could be the case. I would have thought advisers have enough risk on their plate rather than getting involved in alternatives.”

Adviser views

Lee Robertson

Investment Quorum chief executive Lee Robertson

Advisers should be aware of these risk areas. It comes down to the type of advice business you are. If you have got a disciplines process you will tend to avoid contentious areas. But we do know that with issues such as fraud within Sipps or property funds, there is a bit of ambulance chasing going on with claims firms trying to drive up claims. We have got to be aware of them on the horizon but most reasonable-thinking firms are not involved in this stuff. Where it might hit is we all suffer from the Financial Services Compensation Scheme levy so if any of this falls onto the compensation scheme levy it hurts all of us even though we have not been involved in it.


Worldwide Financial Planning IFA Nick McBreen

If people invest and they do it properly and the advice is done properly they are put on notice. If you look at the property funds they clearly say in the pages and pages that you have to provide to a client that they reserve the right to revise their charges and they can close the fund. It is becoming over-weighted now in terms of finding some way of making a complaint.

Expert view

Clarke Willmott partner Philippa Hann

While property funds appear to be recovering in the months following the vote to leave the European Union, how investors will react when the funds reopen and what returns will be made, is still up in the air.

Foreign property investments, in particular, is an area where we are seeing more and more unhappy investors. Funds like the Brazilian Ignition Fund No3, which were sold as medium risk but which have now been put into administration, are causing untold woes for clients, particularly those advised to make the investment into their pension funds, for example.

This crosses the areas of interest into Sipps. Complaints against Sipp providers or against advisers recommending non-standard or unregulated investments, like some of the foreign property funds, into Sipps, is a growing area.

The FCA has strengthened its guidance for Sipp advisers to protect the beneficiaries of their Sipps against unscrupulous introducers or advice but not all providers will have sufficient mechanisms in place. Sipp providers are now required to have enhanced procedures for dealing with unregulated collective investment schemes which includes independently verifying third party due diligence or undertaking due diligence themselves on each Ucis scheme. There is no indication that Sipp providers ought to be able to contract out of this guidance.

The indications are the Financial Ombudsman Service and The Pensions Ombudsman may well take into account the 2013 and 2014 FCA guidance for any Sipp clients invested in Ucis after that date.  This will apply to both advised and non-advised clients.

Sipp providers may well also suffer from a failure to conduct due diligence into those giving the investment instructions. Take, for example, the victims of Mark Kelly and Patrick Gray of PCD Wealth and Pensions Management, now subject to a prohibition order by the FCA.  One has to ask why the Sipp providers, where the two rogues transferred the pensions, accepted instructions from advisers without the relevant permissions?

Crowdfunding is also a really interesting piece at the moment. If you look at the profile of investors in those investments they tend not to be advised and, while the FCA unilaterally added permissions for advising on peer-to-peer lending for many advisers, my impression is not many of those are routinely advising clients to invest.

The lack of clarity on the due diligence procedures undertaken by the platforms appears to be putting many advisers off. However, as investments in alternative finance increase year-on-year, it will inevitably be an area I can see advisers feeling more comfortable with and one where clients demand advice. As always, identifying the true risk of those investments and ensuring they are suitable will be the cornerstone of avoiding complaints in this area.