Ref: DRN complaint

Transcription

1 complaint Mr S considers Cumulus Investment Management Limited (Cumulus) has caused him a loss. In 2013, a pension plan of over 23,000 was transferred to a Self-Invested Personal Pension (SIPP) and invested in the Cumulus Ukrainian Property fund. background An unregulated introducer talked to Mr S about transferring his existing pension plan with Provider P into a new SIPP. Mr S said this introducer told him that he would receive a guaranteed return of 7% a year for the first three years and 3% a year from then on. He also mentioned that he had been led to believe that he was investing into Canadian forestry. Mr S has said this introducer told him about an investment opportunity where he would be better off instead of remaining in the with-profits fund of an existing pension plan. In October 2013 Mr S signed a SIPP application form. This was for a SIPP with Provider A. Cumulus was recorded as Mr S s financial adviser. But it was also recorded: The sale was transacted at distance ; Cumulus didn t specifically advise the SIPP to Mr S; Cumulus didn t advise on the suitability of transferring from other pension schemes. Mr S transferred his 23,000 pension fund with Provider P to a new SIPP with Provider A. This was almost entirely invested in the Ukrainian Property fund. Nearly two years later it appears the fund encountered difficulties. Redemptions from it were suspended. Mr S was unhappy at being unable to withdraw his pension and wanted to be able to transfer his funds to another provider without any penalties or loss. Cumulus did not issue a final response to his complaint. One of our adjudicators concluded the complaint should be upheld. This was after giving Cumulus an opportunity to present its file and state its case. Cumulus did neither. The adjudicator said: It appeared Cumulus thought this was an execution only sale; But the adjudicator didn t think the sale had the hallmarks of being execution only. Mr S did not find out about the investment himself. Mr S had no history of investing in unregulated collective investment schemes (UCIS). His former pension plan was in a with-profits fund. He said he held no saving and investments other than his pension; Cumulus knew an unregulated introducer referred Mr S to it. Cumulus had a duty to act in Mr S s best interests. As a minimum this meant making sure Mr S knew what he was doing i.e. investing in an inherently risky UCIS; As the fund was a UCIS, it was only suitable for certain types of investor. In fact it should only have been promoted to certain types of investor - a high net worth or sophisticated investor. Mr S did not seem to be either; K821x#15

2 The adjudicator was satisfied the fund was not suitable for Mr S. He couldn t see that Mr S was an insistent client or that the sale was truly execution only. But in addition to these concerns, there were also conflicts of interest. For example, the individual adviser named on the SIPP application form was also a director of the fund. So there was a direct financial interest and benefit to Cumulus by Mr S investing in this particular fund; Overall, the adjudicator thought Cumulus breached the regulator s Principles for Businesses and Conduct of Business rules. Cumulus did not appear to have conducted this business with integrity or acted with due skill, care and diligence. And neither did it act in the interests of Mr S; or treat him fairly. Cumulus did not reply to the adjudicator. He confirmed to both parties that he would refer the complaint to an ombudsman to review. my findings I ve considered all the available evidence and arguments to decide what s fair and reasonable in the circumstances of this complaint. When considering what is fair and reasonable, I am required to take into account relevant law and regulations; regulator s rules, guidance and codes of practice; and what I consider to have been good industry practice at the time. The relevant rules are set out in the regulator s handbook. At that time, the regulator was the Financial Services Authority. The rules start with a number of principles that firms should follow. There are then rules that should be applied. I think Principles 2, 6 and 8 are of particular relevance here. They say: Principle 2 - Skill, care and diligence A firm must conduct its business with due skill, care and diligence. Principle 6 - Customers interests A firm must pay due regard to the interests of its customers and treat them fairly. Principle 8 Conflicts of interest A firm must manage conflicts of interest fairly, both between itself and its customers. The rules set out in the conduct of business sourcebook (COBS) also apply to the firm. I think that COBS 2.1.1R is relevant. That rule required the firm to act honestly, fairly and professionally in accordance with the best interests of its client. Mr S was introduced by a colleague to Mr A, who worked for an unregulated firm. Following a meeting with Mr A, Mr S applied to invest in a fund that was unregulated. The fund invested in properties in Eastern Europe. 2

3 What was Cumulus s role? Cumulus was arranging the SIPP for Mr S. And it knew the investment was to be made into the Cumulus Property fund. Although it was acting as a financial adviser, it was trying not to provide advice. Was this an execution only sale? The definition of an execution only transaction is: A transaction executed by a firm upon the specific instructions of a client where a firm does not give advice on investments relating to the merits of the transaction Mr S found out about the SIPP and the Cumulus Property Fund from the unregulated introducer. I think it is arguable that he was given advice to invest in the fund. But, I cannot look at a complaint about the unregulated firm. The only evidence I have that Cumulus gave advice is that it is recorded as the adviser on the SIPP application form. I don t think there is clear and credible evidence that this was a true execution only sale. But, there is limited evidence about whether Cumulus gave advice. I think Cumulus should have treated the transaction with some caution. The question is whether Cumulus should have accepted the business. And in answering that question Cumulus had to keep in mind its regulatory responsibilities. I don t think Cumulus should have accepted the business. I shall explain the reasoning that below. Who promoted the investment? Mr S was unaware of the Cumulus fund until he met with Mr A. It is clear that the fund was promoted to Mr S by the unregulated firm. Could this investment be promoted to Mr S? Mr S has told us that his earnings were less than 100,000 saying he was earning approximately 45,000 a year. He also said he did not have assets valued at more than 250,000. This excludes the value of his home and pensions; as they had to be to meet the definition. So, the investment shouldn t have been promoted to Mr S. Was the investment suitable for Mr S? The Cumulus Property Fund invested in a limited number of properties. These were all in Eastern Europe. It was an unregulated fund which brought its own risks. Mr S started a SIPP and invested almost all of the money in one fund. There was no diversification. I think this was a high-risk strategy for him. Mr S has said that this pension represented all of his pension provision at that point. In my view, it was a risky investment and Mr S was not in a position to accept the risk. I don t think the fund was suitable for Mr S. 3

4 Conflict of interest The Regulator s Handbook, Principle 8 says: A firm must manage conflicts of interest fairly, both between itself and its customers Cumulus is recorded on Mr S s SIPP application form under the Adviser details section. The Cumulus Ukrainian Property fund is listed on the Bermuda Stock Exchange. The investment managers are recorded as Cumulus Investment Management Limited. The prospectus sets out that the fund was established with 100 ordinary shares that would be owned evenly between two individuals. Both of these individuals were also directors of Cumulus Investment Management Limited the firm recorded as Mr S s financial adviser. And indeed one of them is named on the SIPP application form as Mr S s adviser. The fund prospectus explains how the charges and fees would be paid. Clearly, the directors stood to gain by increasing the value of the fund. So it s clear Cumulus Investment Management Limited and its directors had a financial interest in the fund and therefore directly benefit from a capital inflow. Cumulus has said on a different case that there is no conflict of interest between the directors of the fund and Mr S. They say that they are all shareholders in the fund. And consequently their interests are aligned. That misses the point. Before Mr S invested in the fund he had a pension invested in standard investment funds. By paying that into the Cumulus fund the directors stood to gain because of his investment. I think that is a clear conflict of interest. Having identified that conflict, it should have been carefully managed. Client s best interests Cumulus arranged the SIPP. The sole purpose was to invest in an unregulated fund where two of the directors were also directors of Cumulus. They also knew that the introducer was unregulated. I think there are clear conflicts of interest in arranging the investment for Mr S. The investment was unregulated, investing in properties in Eastern Europe. There were a number of risks involved in this type of investment. It was also the only investment made in the SIPP. I think all of the factors above mean that Cumulus should have treated this application with caution. I don t think the investment should have been arranged; or not arranged without making further enquiries. And I think if further enquiries had been made it would have been established that Mr S should not have been sold the SIPP, or invested in the fund. In my view, the failure to act in Mr S s interests has caused the loss. 4

5 fair compensation My aim is to put Mr S as closely as possible in the financial position he would be in but for the actions of Cumulus. There are a number of possibilities and unknown factors. I think an important one is whether Mr S can be freed of the Cumulus Ukrainian Property investment. The simplest way is for this to be sold. But there are no buyers. So, Cumulus should buy it for a commercial value acceptable to the SIPP provider. While it may be complicated to put Mr S back in the position he should now be in, I think it s fair he is compensated now. Cumulus should calculate fair compensation by comparing the value of Mr S s former pension plan, if he had not transferred, with the current value of his SIPP. To do that it should: Obtain the notional current value of Mr S s former plan on the date of my decision if it had not been transferred to the SIPP. I will call this (A); Obtain the actual transfer value of Mr S s SIPP on the date of my decision, including any outstanding charges; Pay a commercial value to buy Mr S s holding in the Cumulus Ukrainian Property Fund; Pay an amount into Mr S s SIPP so that the transfer value is increased to equal (A).This payment should take account of any available tax relief and the effect of charges. If Cumulus is unable to buy the investment, it should treat it as having a nil value for the purpose of calculating compensation. Cumulus may then ask Mr S to provide an undertaking to account to it for the net amount of any payment the SIPP may receive from the Cumulus Ukrainian Property fund. That undertaking should allow for the effect of any tax and charges. Cumulus will need to meet any costs in drawing up the undertaking. The SIPP only exists because of the Cumulus Ukrainian Property investment. In order for the SIPP to be closed and further SIPP fees prevented, this investment needs to be removed. But if Cumulus can t buy it Mr S is faced with future SIPP fees. I think it is fair to assume five years of future SIPP fees. So, if Cumulus can t buy the investment, it should pay an amount equal to five years of SIPP fees based on the current tariff. This is in addition to the compensation calculated above using a nil value for the investment. If it s not possible to pay some or all the compensation into this SIPP, Cumulus should pay the balance (or all of it) as cash. But the compensation should be able to be paid into a pension in the time until Mr S retires and he should be able to contribute to pension arrangements and obtain tax relief. So, in the event of a cash payment, this should be reduced to notionally allow for the income tax relief Mr S could claim. The notional allowance should be calculated using his marginal rate of tax. Mr S is a basic rate taxpayer, so the total amount should be reduced by 20%. 5

6 I have assumed any distributions from the investment already paid to the SIPP have remained in it. I can t see Mr S has taken anything out as tax free cash or income. But if anything has been removed from the SIPP it should be accounted for in calculating (A). Mr S was prepared to take some risk. If there are any difficulties in obtaining a notional valuation from Provider P then the FTSE WMA Stock Market Income Total Return Index should be used. That is a reasonable proxy for the type of return that could have been achieved if suitable funds had been chosen. Mr S thought he had lost a large part of his pension. Cumulus should pay Mr S 150 for the distress and anxiety it has caused him. I would consider making a larger award, but do not want to delay my decision any further. my final decision I uphold Mr S s complaint. Cumulus Investment Management Limited should calculate and pay compensation to Mr S as set out above. Simple interest is to be added to my award at a rate of 8% gross a year from the date of this decision to the date of payment. Under our rules, I m required to ask Mr S to accept or reject my decision before 28 March Roy Milne ombudsman 6