The Upper Tribunal has upheld a decision by the FCA to fine Scottish advice firm Westwood Independent Financial Planners £100,000 over suitability failings in geared, traded endowment policy sales.
The FSA ruled in May 2011 that Westwood failed to ensure suitability of advice in Gtep sales carried out between September 2005 and October 2007.
Westwood appealed the decision in June 2011, and the Tribunal held a nine-day hearing in April and May this year.
In its judgment, the Tribunal found the firm failed to pay due regard to the information needs of its clients, failed to communicate in a “fair and clear” manner and failed to communicate the nature of the plan’s risks.
Over the relevant period, Westwood advised 50 clients to invest in a Gtep plan, from which it made £509,123 in commission.
Westwood recommended a product by Integrity Financial Solutions involving an initial investment to buy a selection of Teps. These were used as security for a loan to buy additional Teps and fund the various payments over the life of the plan.
Several Westwood clients borrowed to fund the initial investment through a mortgage on their home. They were told they would receive a monthly drawdown payment to cover the mortgage payments and, when the Teps matured, there would be sufficient capital to repay the mortgage and loan, possibly with a lump sum left over.
Many of the Gtep plans sold by Westwood have fallen significantly in value although in most cases the underlying endowment policies still have a number of years left to maturity.
Westwood was placed into sequestration, a Scottish term for bankruptcy, in October 2011.
In its ruling, the Tribunal stated: “We note that Westwood made £509,123 commission from the sale of 50 GTEPs during the relevant period. We consider the amount of the penalty should be set at a level that both punishes Westwood for the breaches and deters others from similar conduct. We take the view a penalty of £100,000 or more is a significant amount and would be an effective deterrent to others”.
It remains open to Westwood to appeal the judgment.
The FSA launched a thematic review into Gteps in 2007, which has seen the regulator take action against a number of firms, including Integrity Financial Solutions, Knowlden Titlow Financial Services, Derrick Hales Financial Planning, The Garrison Finance Centre, and The Matrix Model Group UK.
Yellowtail Financial Planning managing director Dennis Hall says: “From the evidence it seems Westwood did not have a leg to stand on. These were crazy practices which I thought had been stamped out 20 years ago.”
Three of Westwood’s clients gave evidence that they approached the firm to discuss taking out a residential or buy-to-let mortgage, and were persuaded to take out the Gtep plan instead, which was described as “a self-funding mortgage”.
Several clients said they were persuaded to tick the medium to high risk option on attitude to risk forms.
One investor said: “We were told that this form had to be signed as a procedural thing; that we were signing about a product that was much lower risk than [an investment bond] but, for the purposes of the FSA, who think even a bank loan is a high risk, we would probably have to sign it as medium to high risk.”
Another couple, who approached Westwood to discuss a mortgage, ticked the low risk box for mortgages but were persuaded they were medium risk. They left the boxes for pensions and investments blank but Westwood ticked the medium/high boxes for them.
Witnesses also claimed Westwood did not make the risks of the investment clear.
One witness said: “All the things Mr Healy [a Westwood adviser] pointed out to us were the positive things. He did it on flipcharts, spreadsheets. He never went into any detail of the risks.”
Westwood also sold a Gtep plan to a 73-year-old woman, which the Tribunal said was “plainly unsuitable” because “there must have been a real risk” she would die during the 15-year life of the plan.
• Gtep plans are high risk products which are inappropriate for anyone but high net worth individuals wanting high risk investments.
• Westwood failed to pay due regard to the information needs of its clients, and to communicate information to them in a way that was clear, fair and not misleading. Westwood failed to adequately explain the risks associated with a Gtep plan.
• Gtep plans are not high risk and were suitable for the clients to whom they were recommended.
• Gearing in relation to the Teps is not a regulated activity FCA rules do not apply. The Tribunal disagreed, ruling gearing could not be considered separately to the other elements of the plan, which were regulated.