ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.
The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.
As we reported in our recent annual review, investment-related complaints made up 17.5% of the total number of new cases we received during the financial year 2008/2009. As in previous years, mortgage endowments formed the largest category of investment-related complaints, followed by complaints relating to:
But we also noted a 30% increase in the number of new complaints relating to "other types of investment" – and the following case studies focus on complaints involving some of those other types of investment activity – including stockbroking, foreign currency exchange and spread-betting.
Mr D held an account with a spread-betting firm. Essentially, spread-betting involves gambling on the outcome – at a given date – of a particular event. The event is generally the value of a share index or of shares in a specific company, or the outcome of a sporting fixture.
Mr D had taken what is known as a "long position" on the shares of a particular company. In other words, he had bet that the value of these shares would increase to a certain value – within a specified timescale. He was expecting to make a sizeable profit as a result.
Shortly after he had taken this position, however, the value of the shares dropped so sharply that it looked as though his loss would be greater than the margin that he had paid the firm in case of such an eventuality. (A margin is a variable payment required by a firm as partial security against potential losses. It can be increased, as potential losses increase.)
As is usual in such situations, the firm phoned him to ask for an increased margin. Unfortunately, it was unable to get any response from the number it called him on. It therefore "closed" the position – and Mr D made a substantial loss.
Mr D said the firm should compensate him for this loss, as it had "made little effort" to contact him. He said it had rung him on an out-of-date mobile phone number, even though "it must have been aware" he had a new number. And he complained that, having failed to contact him by phone, the firm had not then written to him. As a consequence, he had been unaware of the need for an increased margin until it was too late to do anything about it.
He said that if the firm had phoned him on his new number, he would have paid the sum required right away. That would have enabled the firm to keep the position open for longer – increasing the chance that he might still benefit if the share price improved.
The firm rejected Mr D’s complaint. It said it had phoned him on the number he had registered when he first opened his account. Its terms and conditions clearly stated that customers must provide details of any changes to their contact details in writing. Mr D had not done this.
Unable to get any further with his complaint, Mr D then came to us.
complaint not upheld
We examined the firm’s terms of business. These did indeed state that customers were required to notify it – in writing – of any amendments or additions to their contact details. The terms of business also stated that the firm could make requests for margin payments by phone and did not need to confirm any requests in writing.
Mr D had maintained that the firm must have known his new number, as it had called him on it. We established that although the firm had used that new number, it had only done so once – in response to a voicemail message he had left. He had asked if someone could ring him back on that number about a routine administrative query.
There was nothing to suggest that he had ever informed the firm – either in writing or by phone – that he had a new number. If he had mentioned this in the course of a phone call, then he would, as a matter of course, have been told that the firm needed written confirmation before it could update its records.
Overall, we did not consider it unreasonable or unfair for the firm to require customers to notify it – in writing – of any changes in their contact details. We said the firm could not be held responsible for the breakdown in communication. We did not uphold the complaint.
Mr B became a customer of a stockbroking firm on an advisory basis. Under this type of arrangement, the firm does not manage a portfolio of shares on the client’s behalf. Instead, it makes recommendations about where to invest. The client then decides whether or not to follow the advice.
Not long after he invested in a particular company’s shares, on the firm’s advice, the value of those shares plummeted and the company eventually went into administration.
Mr B told the firm he held it responsible for the fact that he was now left with "worthless" shares. He said he would never have made this particular investment if he had been properly advised. And he complained that as well as failing to tell him how risky the shares were, the firm had failed to keep him informed about the company – after he bought the shares.
The firm rejected Mr B’s complaint. It said it had made him fully aware of the risks before he bought the shares – and had no obligation to keep him up-to-date with the company’s affairs after he had made his purchase.
Unhappy with this response, Mr B brought his complaint to us.
complaint not upheld
We noted that the firm had recorded, in its client agreement, that Mr B had a "medium" attitude to risk. Mr B’s investment in the shares of the company in question was in line with his stated attitude to risk – and we saw evidence that he had made broadly similar investments in the past.
The firm’s terms of business, a copy of which he had signed, stated clearly that the firm was not obliged to keep him informed about the progress of any of the companies in which he had invested. We concluded that the firm had not provided Mr B with inappropriate advice or treated him unfairly. We did not uphold the complaint.
Mr C had an advisory account with a stockbroking firm, and received recommendations from the firm about suitable shares that he might wish to buy. Some while after he had invested in a particular range of shares, on the firm’s advice, he noted that the value of his portfolio had fallen sharply.
He complained about this to the firm, saying it should never have recommended the shares in question. Quite soon after opening his account, he had told the firm he could not afford to buy any more shares for the time being, as his funds were all tied up elsewhere. Despite this, the firm had persisted in making recommendations and had suggested he should sell some of his existing shares to pay for new ones.
The firm turned down Mr C’s complaint. It said it had given careful consideration to all the recommendations it had made – but could not be held responsible if the shares subsequently performed poorly. It added that there was nothing inherently wrong in an investor selling shares considered to be "poor performers" in order to fund the purchase of other shares with better prospects.
Unhappy with the firm’s response, Mr C brought his complaint to us.
We noted that the firm’s client agreement with Mr C recorded that he was prepared to make "high-risk" investments. The types of shares that the firm had recommended were in line with this attitude to risk, and he had made significant investments in similar shares in the past. The poor performance of shares recommended by the firm was not, in itself, a reason why his complaint should be upheld.
We then considered whether the recommended share purchases had been affordable, given Mr C’s overall circumstances at the time. The firm had recorded in Mr C’s client agreement that he had "only £5,000 of liquid assets" – and that the rest of his capital was already invested in shares.
The client agreement specified that the firm was only to advise Mr C on investing his "liquid assets". However, the firm had quickly recommended the purchase of shares in excess of £5,000 and had suggested he should sell some of his existing shares to help fund these purchases.
As the firm had clearly noted that Mr C should not invest beyond the limit agreed at the outset, we concluded that it had not given him appropriate advice. We told the firm to pay him redress, calculated on the basis that he should be put back into the position he would have been in, if he had not been poorly advised.
After receiving a mailing from a firm of stockbrokers, Mrs G became an advisory client of the firm. It undertook to advise her on suitable stocks and shares and – over the next couple of years – she bought a number of shares recommended by the firm, including some high-risk technology stocks.
However, when the value of her portfolio fell dramatically, she complained that the firm had failed to advise her correctly. She said she had made it clear, from the outset, that her main objective was to achieve capital growth by investing in medium-risk shares. A number of the shares that the firm advised her to invest in carried a high-risk, and it was the significant fall in value of these shares that had so badly affected her overall investment.
The firm rejected Mrs G’s complaint. It accepted that some of the shares it had recommended carried a higher risk, but it said their "purpose" was to balance some of the lower-risk investments in her portfolio. Mrs G said that this had not been her understanding – and she referred her complaint to us.
We asked to see the firm’s client agreement with Mrs G. This clearly stated that she was not prepared to take more than a "medium level of risk" with her investments. So we told the firm that by recommending shares that carried a higher risk, it had failed to provide Mrs G with suitable investment advice.
We said that, in this particular case, fair compensation could be calculated by comparing the value of the inappropriately-recommended investments with the return that Mrs G would have received, if she had invested the same amount – over the same period of time – in FTSE 250 shares. The firm should then pay Mrs G the difference.
Mr T was an experienced investor who regularly traded in a range of financial instruments, including derivatives and foreign currency exchange. While discussing possible investment opportunities with his independent financial adviser (IFA), he asked the IFA to introduce him to Z Ltd, a foreign currency exchange trading service that was based overseas.
After completing a client agreement, Mr T set up a trading account with Z Ltd – and made an initial deposit of $100,000. Six months later, Z Ltd went into administration. Mr T was dismayed to learn that he might not get back any of the funds in his trading account. It seemed that, at best, he would receive only a proportion of his money – when the firm’s remaining assets were divided between its unsecured customers, on a pro-rata basis.
Mr T complained to the IFA that had introduced him to Z Ltd. He said the IFA had – falsely – assured him that Z Ltd was "safe to do business with" and that it always kept client money in a separate account. He claimed the IFA had also told him – incorrectly – that Z Ltd was regulated by the Financial Services Authority (FSA), so its customers were protected, should things go wrong.
The IFA denied having given any assurances about Z Ltd. It said it had simply arranged an introduction, as Mr T had asked it to do. The IFA pointed out that the documents it had sent Mr T contained nothing to suggest that Z Ltd was regulated by the FSA, or that it held all client money in a separate account. Mr T then referred his complaint to us.
complaint not upheld
It was clear that Mr T had investigated a number of different currency exchange services before he asked his IFA for an introduction to Z Ltd. We were satisfied that the IFA had acted purely as an introducing broker in this case, and that it had not given Mr T any advice. So the crux of the dispute was whether Mr T had been misled about the funds he deposited with Z Ltd.
The IFA and Mr T provided conflicting evidence about what had been discussed during their initial phone conversation. Unfortunately, the IFA was unable to provide a recording of that phone call, so we were unable to establish exactly what had been said.
We looked the documents that the IFA had subsequently sent Mr T. They contained nothing that we considered misleading. There was no suggestion that Z Ltd was regulated by the FSA and no reference to funds being held in separate client accounts. The documents confirmed that Z Ltd was subject to New York law and that it could use clients’ funds – as long as it repaid the money.
We noted that Mr T was an experienced investor. While we could not be certain what the IFA had told him over the phone, we thought it unlikely that he had been misled in the way he suggested. He had been sent detailed paperwork and could easily have detected any inconsistency between what he had been told and what was stated in writing. We did not uphold the complaint.