It is worth looking at the Financial Ombudsman Service decisions in which it was decided TenetConnect Limited was responsible for the losses suffered by four separate clients, each of whom had effected a Sipp with a view to investing in a golf course in Spain. They are worth looking at because they were probably correct.
The cases raised the questions of whether each of the transactions were carried out on an execution-only basis and if not, although the firm itself had not given the clients any advice, whether it was under a duty of care and so should have advised the clients the proposed investments were unsuitable.
The facts in each case were broadly similar and are only briefly summarised in the decisions. One client’s complaint was that the firm had given him unsuitable advice to transfer his pension into a Sipp with the intention he should invest his pension funds in shares in a company that owned a golf course in Spain.
The client had been introduced to the firm by an unauthorised introducer, which had specifically agreed with the firm in its introducer agreement that it would not give investment advice to prospective clients. Despite that, the introducer told the client it was a good time to release his pension and there were good investments to be made. The introducer was marketing the proposed investments, so presumably the golf course was suggested as being one such good one.
The client was introduced to the firm so the transfer to the Sipp could be arranged and then the investment in the golf course could be made. The client later discovered that instead of owning shares in the golf course company, he owned only a piece of land adjacent to the golf course. Since then, he has been unable to transfer his pension funds to something more suitable. Hence the complaint.
The firm said it had not given any advice to the client and the investment was effected on an execution-only basis. But that does not bear close scrutiny. An execution-only transaction is defined in the FCA Handbook as: “a transaction executed by a firm upon the specific instructions of a client where the firm does not give advice on investments relating to the merits of the transaction…”.
In simple terms, the initiative for a true execution-only transaction has to come from the client. The client contacts the firm and gives specific instructions. For example, he phones his financial adviser and instructs him to buy 1,000 BT shares. The client does not expect any advice on the merits of the instruction and the financial adviser does not give any. He is simply looking to the adviser to carry out the instruction.
In one of the leading cases on the distinction between advice and information, Rubenstein v. HSBC, the trial judge said:
“The key to the giving of advice is that the information is either accompanied by a comment or value judgement on the relevance of that information to the client’s investment decision, or is itself the product of a process of selection involving a value judgement so that the information will tend to influence the decision of the recipient.”
The firm must have known the introducer had marketed the investment and, in the process, will have involved offering a value judgement on the merits of the investment. Thus the introducer must have given advice or made a recommendation. The firm could not simply ignore what its introducer had done or said, especially where the introducer was specifically prohibited from giving advice by both the regulatory regime and the introducer agreement by which it was appointed to make introductions to the firm.
Further, the Sipp provider had asked the firm to sign a declaration to the effect it had warned the client to be aware that investments of the kind in question may have an adverse impact on the Sipp. The firm had signed that declaration. The giving of that warning to its client would have amounted to giving a value judgement on the transaction. In other words, by its declaration to the Sipp provider, the firm was saying it had given some advice. The transaction could not therefore have been an execution-only one. The ombudsman was right to reject the firm’s attempt to rely on that argument.
In the circumstances in which the introducer had in effect sold the investment to the client, and in which the firm was being asked to sign a declaration that it had given the client an appropriate warning, it is an inescapable conclusion that the firm owed the client a duty of care to provide proper advice. Also, it may be worth adding that even if there is no duty to advise (because the transaction really was on an execution-only basis) there remains a duty to provide accurate information.
Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of moneymatterslegal.co.uk