I issued a provisional decision in September 2013 concluding that Mr A s complaint should be upheld.

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1 complaint Mr A s complaint, in summary, is that Lighthouse Advisory Services Limited advised him to invest in a carbon trading partnership scheme (CTP) that was unsuitable for him. background I issued a provisional decision in September 2013 concluding that Mr A s complaint should be upheld. In summary I said that the business s letter in March 2005 went beyond a mere introduction to the CTP. I considered that this letter proposed that Mr A invest in CTP as a potential solution to his cash flow problems stemming from a previous investment and also as an alternative to another scheme that the business had recommended which had encountered some difficulties. Having considered that the business advised Mr A to invest in CTP I provisionally concluded that this advice was unsuitable for Mr A s circumstances. I accepted that the business had asked Mr A to seek confirmation from the promoter of the carbon scheme about some of its technicalities but I was persuaded that ultimately Mr A invested into CTP based on the business s recommendation. In response to my provisional decision, the business said, in summary: The letter in March 2005 was a mere introduction to the promoter of the scheme and not a letter of recommendation. Mr A s professional status would have allowed him to understand that the business was only introducing him to CTP. Mr A had invested in previous UCIS investments so he would have been aware of the correspondence he would receive if advice was given to him, such as a suitability letter and other relevant documentation. In any case, the complaint is time barred. The alleged advice was more than six years before receipt of the complaint. In addition, Mr A would have been aware that he had cause to complain more than three years before he actually did, in particular in July 2007, when he received an from the managing partner of the CTP informing him about investigations made by HMRC into the scheme. Mr A had previously expressed concerns about two higher risk investments he had invested in and so the July from the carbon scheme promoter ought to have caused him concerns about the suitability of the investment. As regards the proposed compensation, very little information has been provided by Mr A about his loss. So the provisional decision is based on a series of assumptions which makes it impossible to assume quantum fairly. The business also provided a statement from the adviser who wrote the letter of March He said that his letter in March 2005 made it clear to Mr A that he was acting solely in the capacity of introducer and that he could not advise him about the scheme. The adviser also said that he referred Mr A to the promoter of the CTP and a subsequent meeting with the promoter did take place. The adviser added that this meeting was paramount to let Mr A decide whether or not to invest since he had warned Mr A that it is K821x#12

2 only through this meeting that Mr A could squarely face the facts about CTP. The adviser finally said that in any case the CTP was an appropriate solution to Mr A s cash flow problems, in particular in relation to school fees. Mr A s representative said: The letter of March 2005 was both a promotion and advice. Mr A s employment history would not have made him be able to identify the circumstances when advice was being given and when not. The complaint is not time barred. In particular, the promoter s letter of July 2007 was written in such a way as to allay investors fears. Mr A has no recollection of any meeting with the promoter following the March 2005 letter. As regards Mr A s final position, he took out a loan of 55,000 to finance his investment on which he has incurred interest. The adjudicator wrote to the business on the matter of jurisdiction to say that he did not consider the complaint was time barred. He said that whilst the complaint may have been referred to the business more than six years after the event complained about, he was not persuaded that Mr A would reasonably have become aware that he had reason to complain against the business based on the letter of the promoter of the scheme in July The adjudicator considered that the letter did not address the fundamental issue of the suitability of the scheme for Mr A and had a reassuring tone about the HMRC investigation. The business responded to reiterate that the complaint should be time barred. It also said that the available information does not help to sufficiently determine the amount of compensation. It insisted that Mr A must provide evidence of loan repayments. The adviser provided a further statement. In summary, he insisted that no advice was given by him. He said that on previous occasions when he made recommendations to Mr A due process was followed (such as completion of fact find, issues of suitability letter etc). Mr A knew about this process and hence had a clear understanding that on this occasion the adviser was only introducing the scheme to him and not advising. The adviser reiterated that Mr A did meet the operator of the scheme and it was only as a result of that meeting Mr A decided to invest, not on the basis of his letter which clearly advised Mr A to talk to the operator first. my findings I have considered all the available evidence and arguments to decide what is fair and reasonable in the circumstances of this complaint. Jurisdiction Like the adjudicator I am not persuaded that Mr A would have become aware that he had reason to complain against the business based on the letter of July 2007 from the managing partner. Whilst the letter brought to Mr A s attention the fact that the scheme had run into difficulties, I consider that this letter painted a positive picture overall. For example the letter went on to state that despite the disruption, sufficient votes were returned in favour of a bid and that 2

3 the bidder remained fully supportive of the Carbon Trading Partnerships. The letter also stated that in structuring and executing the scheme, the managing partner always acted in accordance with professional advice from experts and that it will defend the position of the LLPs. It may be that Mr A has had some difficulties with previous schemes but it was explained to Mr A by the business that those difficulties were due to some specific reasons associated with those investments, and as I consider later, the adviser presented the CTP as different to previous schemes. So I am not persuaded that the experience Mr A had with previous schemes would automatically mean that he ought to be aware that he had a cause for complaint against the business in respect of CTP. Overall, I have not seen sufficient evidence for me to be able to conclude that Mr A s complaint should be time barred as claimed by the business. Merits did the business advise Mr A to invest in the UCIS? I have carefully considered the business s submissions that the adviser did not make any recommendation but only introduced the CTP to Mr A. In the letter of March 2005 the adviser stated that the CTP had not been passed by the business s compliance department as it did not have a chance to prepare a due diligence report. He said: Given this I am not able to advise on Carbon Credits under our compliance regulations However I am able to provide you with information to direct you further! The adviser suggested that Mr A either take advice from a suitable qualified adviser, or sign an intermediate customer status form, which is effectively an execution only basis for making the investment (i.e. no advice being given), which you are eligible to do.. In the end he said: I hope the above information has been helpful and please do liaise closely on this. It may be that adviser considered that he was only providing information to Mr A and told him so. It may also be the case that the adviser may have followed a certain process (as for example completing a fact find) if in his opinion he was providing advice. However, I consider that whether advice was given depends on the contents of the adviser s communication (in this case the letter) taking into account the context in which it was made. In this instance, Mr A had in the past invested - on the business s recommendation - in two film partnerships ( Series 1 and Series 2 ), primarily with borrowed funds. Towards the end of 2004, the business advised that Mr A consider investing 75,000 in Series 3, with the help of borrowed funds. However, around that time, concerns were raised about the film partnerships, in particular about Series 1. In the letter of March 2005 the adviser explained the position in respect of the film partnerships. He said that the worst case scenario for Mr A could be a substantial loss in Series 1. This meant that, apart from the loss suffered from the investment, Mr A had to 3

4 consider putting in place alternative arrangements to meet the tax claw back which was due in the near future. The adviser said that given the uncertainties, Mr A might not want to further invest in the proposed film partnership (Series 3). The adviser then discussed CTP, contrasting it with the earlier film partnership schemes. He said: The scheme.. is fundamentally different to a 'sale and leaseback' type arrangement whereby part of the original tax rebate is effectively paid back to the IR each year. This does not happen in the carbon credit scheme! As you are also aware for every 100 invested the investor receives 164 rebate- ie 164% return on investment compared to 141% re Series 1.Given all the above, your current (film partnership) investments and the contingency cash flow demands that have to be budgeted for re tax payments, the carbon credit scheme could be a useful cash flow injection. Thus based on the rebate ratio (100:160), then the original proposed investment..of 75,000 could provide an extra approximate cash flow injection of 48,000 worth careful thought Furthermore, the proposed investment of 75,000 made before this tax year end would enable this planned rebate to be due in the autumn, of approximately 48,000 ready to fund the. tax claw back in January 2006 It seems to me therefore that carbon credits could well be part of the game plan now and given the interest to the scheme.. I would very much recommend that you have a meeting with [promoters of the scheme]. so as to be able to face the facts squarely, and not necessarily therefore be deterred in view of [film partnership s] early seemingly bad start.this would clearly help to strengthen your position re the.. claw back problem, so leaving you more flexible to plan and fund for increasing school fees etc from now on (in respect of the earlier film partnership investment)..all is not necessarily lossed income may well go up, but clearly this is the time to take all steps to safe-guard and mitigate one position as much as possible. Carbon Credits is well timed on this point for you, and could significantly overcome the cash flow claw back problem, and so safe-guard your school fees funding strategy- which cannot wait I consider that the above statements and in the context in which they were amounted to providing Mr A with advice as to the course of action he should take. Chapter 8 of the Perimeter Guidance Manual of the FCA states that in the FCA's view, advice requires an element of opinion on the part of the adviser. Section states that: The effect of advice being given in the circumstances referred to in PERG G is that: (1) it must relate to an investment which is a security or a relevant investment; (2) that investment must be a particular investment; (3) it must be given to persons in their capacity as investors or potential investors; (4) it must be advice (that is, not just information); and 4

5 (5) it must relate to the merits of investors or potential investors (or their agents) buying, selling, subscribing for or underwriting (or exercising rights to acquire, dispose of or underwrite) the investment. The business s letter of March 2005 was about a collective investment scheme and as such related to an investment. It was with reference to a particular CTP. It was given to Mr A in his capacity as an investor or potential investor. It was advice as I consider it contained adviser s opinion as to the merits or potential drawbacks of investing in the CTP including his opinion as to how the investment was well timed, could significantly overcome the cash flow problem and safeguard the school fees funding strategy which cannot wait. In summary, I remain of the view that the business letter of 14 March 2005 constituted a recommendation to Mr A to consider investing into the carbon scheme, as a viable solution to Mr A s cash flow issues arising out of the school fees requirement and the likely claw back of the tax relief in relation to a previous investment. Was the advice suitable? The business has provided us with a fact find completed in early 2004 and it does not appear that Mr A s position was very different in March The available information suggests that apart from a jointly held property on which there was a substantial mortgage, Mr A s investments comprised of some cash and the two film partnerships. As mentioned earlier, there were concerns about the viability of the film partnerships and their true worth. So, in effect, not much value could be attributed to his investments in the film partnerships. On the other hand there were loans attached to those partnerships. In addition, there was the added issue of the potential claw back of substantial tax relief by HMRC which was to have immediate impact on Mr A s cash flow. Whilst the adviser suggested that the new CTP scheme could help Mr A tide over cash flow requirements by way of tax relief, there was no guarantee that it could happen and if it did not, that would only leave Mr A with additional debt. Indeed it does not appear that Mr A obtained any tax relief on the investment. Overall, I am not persuaded that it was appropriate for Mr A to invest further into another higher risk UCIS and with more borrowed funds. Did Mr A act on the business s advice? In the March 2005 letter the adviser stated by way of rounding up the issue:... To enable you to make this decision you can see why I advocate for you to personally meet [the promoter] over such an important matter. Presumably if you are likely to make the Carbon Credit investment next year - then why defer now - that would be my question to them. I would need full reassurance over this - and it would rest on the unequivability of the 3 year exit route, (which guarantees to pay back the 80% geared loan on your original investment) and obviously the proven and upfront eligibility for tax relief, for Carbon Credits R&D. Given this, my case would rest!... I accept that the business suggested that Mr A speak to the promoters of the scheme. There is some dispute as to whether or not he did. 5

6 In any case, what the business asked Mr A to do was to seek confirmation from the promoters about (a) the exit route and (b) the eligibility for tax relief for carbon credits. As I understand it, this exit route was available and in the end the partnership loan was effectively paid back through this route. It was also the case that, generally speaking, the tax relief was available for carbon credits subject to certain conditions. It is not possible for me to know with certainty what was discussed by Mr A with the promoter if he had met them. However, given the above, I consider it more likely that any such discussion with the promoters would not have materially altered the suggested course of action. I consider that the business s letter was quite detailed and was sufficiently persuasive that the CTP was different to that of the previous film partnerships. As the business was his adviser, I consider that it was not unreasonable for Mr A to believe that CTP was suitable to his needs and hence proceeded on that basis. Therefore, for the reasons given I remain of the view that the complaint should be upheld. fair compensation In assessing what would be fair compensation, I consider that my aim is to put Mr A as far as possible in the position he would have been in if he had not been inappropriately advised by the business. Mr A s own funds It does not appear that Mr A used any of his own funds to make the investment into CTP. Mr A s borrowed funds It appears that Mr A invested 55,000 into the CTP and that came entirely from borrowed funds. As I have concluded that Mr A would not have invested (and hence not borrowed) but for the business s advice, it follows that the business should compensate Mr A for any payment he had to make towards the borrowings. Therefore, in respect of the borrowed funds, the business should reimburse Mr A any payments he made to his lender. In addition it should pay interest at 8% simple per year from the date of each payment to the date of settlement. The business should also arrange to repay any outstanding loan in respect of the investment. Mr A should provide the business with all relevant information, in particular about the loan taken in relation to the investment, in order to assist the business with the calculation of the compensation due. Current value of the investment The current value of the investment is effectively the current net value of Mr A s partnership interests. 6

7 As regards the loan taken by the partnership, Rebus says that the partners sold 51% of their holding to an entity called EEC, which Rebus says was a subsidiary of the lender. It appears that, in return, the partnership loan was written off. Rebus says that the remaining 49% retained by Mr A has no intrinsic value. On the other hand, I have seen submissions that appear to suggest that the partnership acquired a 49% shareholding in EEC and in return had its debt written off but EEC failed soon after. Either way, it appears that the partnership loan has been written off. As regards the underlying investments, it seems there is a dispute as to what these are actually consist of (see below) and in any case it appears that the investments are currently illiquid. Overall, it does not appear that Mr A s remaining holding in the partnership, however held, currently has any intrinsic value. Therefore for the purposes of calculating Mr A s loss to date, the current value of the investment should be assumed to be nil. Tax relief Mr A has confirmed on more than one occasion that he has not received any tax relief on the investment he made. So for the purposes of calculation of loss to date, it should be assumed that no benefit has accrued to Mr A in this regard. Potential future liabilities and benefits I understand that a partner s liability (and benefits) ceases from the point when the partner leaves the partnership, but, in addition, the Finance Act 2004 introduced measures that resulted in an exit charge being a possibility when an individual leaves a partnership. Ideally therefore the parties should establish from CTP the extent of which any overall partnership indebtedness would be attributable to Mr A should he choose to retire now from the partnership, which the firm should make good. However, it seems that there are several issues in this case that could make such a calculation difficult. For example: As I understand it, HMRC has filed criminal charges against certain directors of the company which acted as the managing partner, and some others. I also understand that the case is scheduled to come before the high court soon. I have also seen submissions that a steering committee of the investors (into the partnership) could following the outcome of the criminal case file a second, civil case against the defendants. We are told that this is with a view to be able to get a court order to retrieve any available assets. However Mr A s representative says that should a civil case start it might not be concluded for several years. Given all the above, it is clearly not possible for me to know now for certain whether at all the partnership will be in a position to resume its business and/or whether the investors would be able get any return out of the partnership in future. 7

8 It is also not clear what would be the outcome of the dispute with HMRC about its decision to disallow tax relief. It could well be that this also depends on the outcome of the court case. However, even if HMRC agrees to allow any tax relief, this would effectively only be a tax deferral in that if the partnership was able to resume its activities and generate gains, Mr A might be required to pay tax on them. Mr A s representative also says that HMRC could regard the sale of 51% partnership rights as a capital gain and there could be potential tax liabilities arising out of it. Again there is uncertainty as to whether this would happen. Overall, it is possible that in future Mr A could obtain some benefits by way of some return from the partnership or tax relief on his investments. But he could also incur some additional liabilities. It is not at all clear what the amounts involved would be. Having said that, I cannot rule out the possibility that none of this could ever materialise and indeed this appears most likely based on the current information available to me. Our job is to help settle individual disputes between consumers and businesses providing financial services fairly, reasonably, quickly and informally. Determining fair compensation is not an exact science. What I am aiming to do is to arrive at a fair and reasonable outcome that would put the consumer as far as possible in the position he would have been in if he had not been inappropriately advised by the firm. In this instance, after careful consideration, I do consider it reasonable to assume, given the circumstances of the case as I see it, that Mr A is unlikely to receive significant benefit or suffer a substantial liability from the investment in future. Therefore I have provisionally concluded not to make any allowance with regard to potential future liabilities and returns in arriving at what I consider to be fair compensation. my final decision For the reasons I have given I uphold this complaint and order Lighthouse Advisory Services Limited to pay compensation as set out above. Raj Varadarajan ombudsman 8