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Snapshot judgement

It seems from our clinic postbag that the subject of complaints

continues to get IFAs hot under the collar and not without just

cause. As usual, we include a round-up of readers&#39 questions, after

which we ask if there is light at the end of the tunnel.

Q: As a sole trader, is it appropriate that I deal with a complaint

relating to advice that I have given?

A: This is a common dilemma facing many sole traders who may feel

they are unable to review impartially a complaint relating to advice

that they have given. In the DISP section of the FSA handbook, the

rules relating to complaint-handling procedures require that

“complaints be investigated by an employee of sufficient competence

who, where appropriate, was not directly involved in the matter which

is the subject of the complaint”.

While this would allow you to delegate the investigation to an

employee, you would need to consider whether that employee had

sufficient competence to investigate the complaint and, most

important, you would need to feel comfortable in their ability to do

so. In our experience, a more robust response to a complainant can

usually be provided by a third party outside the firm, which also

serves to reinforce the element of independence.

Q: I may need to settle an endowment complaint. Is there a method of

calculating compensation and what happens if, at maturity, the

endowment has performed sufficiently well to repay the loan?

A: As a starting point, when considering compensation for any

inappropriate investment advice, the rule of thumb is that the

investor should be put back in the position they would have been in

prior to the advice. In extreme circumstances, it may be necessary to

consider whether the investor has suffered any distress and

inconvenience which may warrant a nominal payment.

Within the DISP section of the FSA handbook, the Annexe 2 guidance

shows how compensation should be calculated when assessing endowment

complaints. There are a number of factors you will need to consider

to arrive at an estimated figure and the guidance takes into account

a range of scenarios.

In our experience, there is usually a deal to be done with a

complainant when it comes to agreeing any compensation in settlement

of a complaint. In this respect, you should be aware that the FSA&#39s

views on how endowment losses should be calculated are only guidance

and not a rule.

Before making any offers of compensation, it is imperative that you

obtain the agreement of your PI insurer. Key points to bear in mind

once you make the offer are that it should be on a “without

prejudice” basis and you should always obtain written agreement from

the claimant that they accept any compensation as being in full and

final settlement of all and any claims relating to the matter.

The second part of your question highlights what many of us consider

to be a fundamental flaw in any situation where redress is offered

based on a snapshot of a long-term investment. The same situation

occurred with pension reviews where investors were being offered

redress based on a calculation that suggested they had suffered a

prospective loss on a policy that in most cases was many years away

from maturity. In partial recognition of this, firms were allowed to

offer guarantees rather than pay out compensation at the date of a

loss calculation. Unfortunately, there is no mechanism that provides

for revisiting endowment or any other review cases where compensation

has been paid to assess at maturity whether there has been an


Q: Is there light at the end of the tunnel?

A: This is a question many IFAs are asking with regard to the

increasing number of complaints they are seeing. We feel that

complaints will grow as the compensation culture becomes more

widespread. For IFAs, the only reducting factor would be a resurgence

in stockmarkets. The extent to which clearly vexatious complaints are

able to succeed in reaching the Financial Ombudsman Service was

highlighted in the February edition of Ombudsman News, which featured

a ludicrous claim for compensation from a customer for £670,000

because, unfortunately, endowment policy documents had been sent to

the customer&#39s previous address. The customer demanded compensation

from the firm comprising:

•£500,000 for stress, severe emotional trauma and depression.

•£75,000 for loss of income.

•£20,000 for the cancellation of a holiday.

•£75,000 for unwelcome intrusion into his life by criminals.

Although the firm went out of its way to apologise and offered

£500 compensation, the FOS still felt it necessary to

investigate the complaint. Although it was not upheld, it serves to

highlight the threats that firms face from complainants for a case

such at this, which clearly should not have been entertained by the



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