I have considered all the available evidence and arguments to decide what is fair and reasonable in the circumstances of this complaint.

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1 complaint Mrs F, represented by Mr F, complains that the recommendation given by Greystone Financial Services Limited to invest in the ARM Assured Income Plan was unsuitable. background In 2008 Greystone advised Mrs F to invest 150,000 in the ARM Plan. In December 2011, Mrs F complained to Greystone about the advice. It did not uphold the complaint. One of our adjudicators considered the complaint and recommended that it be upheld. She concluded that the risk posed by the ARM Plan exceeded the level of risk that Mrs F was willing to expose the capital to. Greystone did not accept the adjudicator s findings. It said that the plan was suitable for Mrs F and was within reasonable proportion of Mr and Mrs F joint investable assets. It said that there was no causal link between its advice and Mrs F s losses. Greystone said that Mrs F s complaint be redirected towards Catalyst (the primary distributor of the plan). It was of the opinion that Mrs F could direct her claim to the Financial Services Compensation Scheme ( FSCS ) as Catalyst has been declared in default. Greystone felt that this complaint should be dismissed, or at least postponed until it was decided whether the FSCS would pay compensation for claims against Catalyst. Greystone also did not agree with the compensation method proposed by the adjudicator and suggested that the compensation ought to be calculated in line with Bank of England base rate plus between 1% and 3%, or the interest rate for one year fixed rate bonds. my findings I have considered all the available evidence and arguments to decide what is fair and reasonable in the circumstances of this complaint. I have noted Greystone s suggestion that the complaint be dismissed or delayed until it is known whether Mrs F could obtain redress via the FSCS by bringing a complaint about Catalyst. But this service cannot tell Mrs F who she should bring her complaint against. Greystone provided Mrs F with investment advice and the consumer is eligible to complain about it, so it is appropriate that we consider the complaint. Further, Mrs F has made it clear that her complaint is about Greystone, not Catalyst in respect of this investment. So I cannot agree I should dismiss the case or delay it further. At the time of advice, Mrs F was looking for an investment opportunity that would produce an income to replace that produced by another, maturing investment. Greystone presented the ARM plan as an investment designed to return the capital in full and to maintain the level of income stated at the outset of the plan. It categorised the investment in the portfolio valuations under Guaranteed contract. The available evidence suggests that Mr and Mrs F were jointly willing to take some level of risk and as such I accept that the balanced risk profile was a reasonable classification. However, the ARM plan was expected to produce a return of 10% per year. This was twice K821x#14

2 the Bank of England base rate at the time of 5%. I consider that achieving a return of this level required a higher risk approach than was suitable to Mrs F s balanced risk attitude. The recommendation report said that the ARM Plan invested in cash, near cash and American life policies. The report included positive information about American life assurance products and referred to other steps ARM had taken to protect investors. In its final response letter, Greystone pointed to a brochure that was provided with its report and gave more detailed information about the risks of investing in the ARM Plan. However, given the substantial risks involved, I consider that these should have been highlighted in the main suitability report. The main report did not alert Mr F (on behalf of Mrs F) to the liquidity risks associated with the ARM Plan or that it was unregulated. Mrs F should not have to search for such important information. In any case, Mrs F was receiving advice from the business, so she was entitled to rely on that advice and on the adviser s presentation of the suitability of the fund for her needs. Therefore, I do not agree that giving product literature absolved the adviser from his responsibility to provide suitable advice to the consumer. Greystone has provided an expert s report in respect of ARM, traded life policy investments ( TLPIs ) and their risks. The expert disagrees with the guidance note the FCA issued in April He says that TLPIs and the ARM Plan were no more than low to medium risk and that an IFA would not be expected to conclude otherwise at the time of the advice. I have considered the views and points made in the expert s report, but I have also taken into consideration that the ARM brochure warned that participation in the plan could involve substantial risks. Greystone was, or reasonably ought to have been, aware of this when it recommended the product to Mrs F. Greystone has sought this service s view on the risk of the investment, but it is not my role to rate products. I am required to determine whether the investment was suitable for Mrs F, taking account of her circumstances and attitude to risk. I would however point out that the regulator has issued guidance concluding that generally TLPI products are high risk. Further, the investment was a Special Purpose Vehicle (SPV), was comparable to other nonmainstream pooled investments such as Unregulated Collective Investment Schemes ( UCIS ) and should have been treated with a similar level of care and caution by the adviser. The ARM Plan itself was subject to a higher level of risk and volatility. The fund was based offshore and not subject to UK regulation. Nor did it have the benefit of an investor s protection fund, namely the FSCS. There were a number of risks associated with this investment. The underlying investments are difficult to value, illiquid with often only a limited secondary market for selling opportunities; there is longevity risk in that due to medical advances and such, the lives assured in the underlying policies live longer than expected; insurance companies may become insolvent and claims on the death of the policyholder cannot be met; the fund was exposed to leverage risk due to borrowings and also to currency fluctuation risk. Overall, I consider that the investment was above the level of risk Mrs F was prepared to take. The business says that the investment formed only about 8% of Mr and Mrs F s overall investible assets. Whilst that may be the case, I have not seen any evidence to show that 2

3 the business made its recommendation on the basis of their overall investible assets and if it did, made that clear to Mrs F so that she was in a position to make an informed decision. In fact the recommendation letter stated: The advice in this letter is restricted to the area of reinvesting the monies that are due to mature and is not intended to provide you with a comprehensive financial planning review. In any event, I note that Mr and Mrs F s investible assets (excluding pension plan) already held sizeable proportion in higher risk UCIS or non-mainstream pooled investments. So I consider that the recommendation to invest nearly 12% of their non-pension funds into ARM plan was not suitable for the balanced risk profile. Greystone suggests that its advice did not lead to Mrs F s losses. It refers to there being many actions by third parties including misrepresentation in the product literature that Catalyst distributed and ARM s failure to ensure it had the necessary authorisation by the Luxembourg regulator. However, as I have concluded that Mrs F should not have been advised by Greystone to invest in the ARM Plan in the first instance, I am satisfied that she should be compensated for any loss she incurred as a result. I have considered the points Greystone raised in relation to the proposed compensation method. The Financial Ombudsman Service determines a case on its individual merits and the compensation formula may vary dependent on individual circumstances. I consider the proposal set out by the adjudicator is fair and reasonable in this instance as explained below fair compensation In assessing what would be fair compensation, I consider that my aim should be to put Mrs F as close to the position she would probably now be in if she had not been given unsuitable advice. I take the view that Mrs F would have invested differently. It is not possible to say precisely what she would have done differently. But I am satisfied that what I have set out below is fair and reasonable given Mrs F's circumstances and objectives when she invested. what should Greystone do? To compensate Mrs F fairly, Greystone must compare the performance of Mrs F's investment with that of the benchmark shown below. The compensation payable to Mrs F is the difference between the fair value and the actual value of Mrs F's investment. If the actual value is greater than the fair value, no compensation is payable. Greystone should also pay Mrs F any interest, as set out below. Income tax may be payable on the interest awarded. In addition, Greystone should pay Mrs F 300 for the distress and inconvenience caused in this regard by the loss to her investment. 3

4 investment name ARM Plan status still exists benchmark FTSE WMA Stock Market Income Total Return Index from ( start date ) date of investment to ( end date ) date of my decision additional interest 8% simple p.a. from date of decision (if compensation is not paid within 28 days of the business being notified of acceptance) actual value This means the actual amount payable from the investment at the end date. If at the end date the investment is illiquid (that is could not be readily sold on the open market), it may be difficult to work out what the actual value is. In such a case the actual value should be assumed to be zero. This is provided Mrs F agrees to Greystone taking ownership of the investment, if it wishes to. If it is not possible for Greystone to take ownership, then it may request an undertaking from Mrs F that she repays to Greystone any amount she may receive from the investment in future. fair value This is what the investment would have been worth at the end date had it produced a return using the benchmark. Any withdrawal, income or other payment out of the investment should be deducted from the fair value at the point it was actually paid so it ceases to accrue any return in the calculation from that point on. If there are a large number of regular payments, I will accept if Greystone totals all those payments and deducts that figure at the end instead of deducting periodically. why is this remedy suitable? I have decided on this method of compensation because Mrs F wanted income with some growth and was willing to accept some investment risk. The WMA index is made up of diversified indices representing different asset classes, mainly UK equities and government bonds. It would be a fair measure for someone who was prepared to take some risk to get a higher return. It is not the case that the index was made up entirely of equities. As I understand it, equities formed only about 55% with the rest predominantly in Gilts index. The mix and diversification provided within the index is close enough to allow me to use it as a reasonable measure of comparison given Mrs F's circumstances and risk attitude. my final decision Where I uphold a complaint, I can make a money award requiring a financial business to pay compensation of up to 150,000, plus any interest and/or costs that I consider appropriate. If I consider that fair compensation exceeds 150,000, I may recommend the business to pay the balance. 4

5 determination and award: I uphold the complaint. I consider that fair compensation should be calculated as set out above. My decision is that Greystone Financial Services Limited should pay Mrs F the amount produced by that calculation up to a maximum of 150,000 (including the award of 300 for the distress and inconvenience) plus any interest set out above. If Greystone Financial Services Limited does not pay the full fair compensation, then any investment currently illiquid should be retained by Mrs F. This is until any future benefit that she may receive from the investment together with the compensation paid by Greystone Financial Services Limited (excluding any interest) equates to the full fair compensation as set out above. Greystone Financial Services Limited may request an undertaking from Mrs F that either she repays to it any amount she may receive from the investment thereafter or if possible, she transfers the investment at that point. Greystone Financial Services Limited should provide details of its calculation to Mrs F in a clear, simple format. recommendation: If the amount produced by the calculation of fair compensation exceeds 150,000, I recommend that Greystone Financial Services Limited pays Mrs F the balance plus any interest on the balance as set out above. This recommendation is not part of my determination or award. It does not bind Greystone Financial Services Limited. It is unlikely that Mrs F can accept my decision and go to court to ask for the balance. Mrs F may want to consider getting independent legal advice before deciding whether to accept this decision. my final decision I uphold the complaint. My decision is that Greystone Financial Services Limited should pay the amount calculated as set out above. Under the rules of the Financial Ombudsman Service, I am required to ask Mrs F to accept or reject my decision before 13 April Raj Varadarajan ombudsman 5