complaint Mr A had a Self Invested Personal Pension (SIPP) portfolio managed by Tilney Investment Management. Mr A has complained about the holding of the British Real Estate Fund (BREF) in his SIPP portfolio. He considers that it was too high risk for his portfolio. background The circumstances of this complaint are set out in my provisional decision which I issued in July 2013 (a copy of which is attached). In summary, my provisional conclusions were that Mr A s complaint should be upheld. The BREF fund (which is a higher risk fund) when taken together with the other higher risk elements unbalanced the portfolio so that it was not suitable for Mr A. Mr A agreed with my provisional conclusions and had nothing further to add. Tilney asked me to reconsider my view that its separate exercise of reviewing client holdings of BREF was not relevant. It said that as it was accepted that Mr A s holding of BREF was not excessive it is reasonable to exclude the BREF holding from any redress calculation. It said that an investor would end up effectively being compensated for the very poor performance of BREF, when there was no problem with the holding. Tilney also questioned the use of the APCIMS Growth index. It said this was inconsistent both with Mr A s medium attitude to risk as well as with other adjudications and decisions they had received from the Financial Ombudsman Service. my findings The key finding in my provisional decision was that Mr A s portfolio had too much exposure to higher risk investments (including BREF) and that as a result it was not suitable for the medium level of risk that Mr A was prepared to take. Neither Mr A nor Tilney has said anything more about this issue. I therefore confirm that I am satisfied that Mr A s portfolio had too much exposure to higher risk investments. The result of this was that the portfolio was not suitable for him. Where a portfolio is found to be unsuitable then our normal approach would be to compare the performance of the unsuitable portfolio with the performance of a notional suitable portfolio. This was the approach I suggested in my provisional decision. It is clear that the very poor performance of BREF (it has lost all its value) will be a major factor in the amount of compensation due to Mr A. However, I do not consider this to be an unreasonable outcome. Mr A s portfolio is unsuitable. It is unsuitable because it has too high an exposure to higher risk elements. All of the high risk investments held in the portfolio are individually suitable investments for the portfolio and none are held in amounts that are excessive. The BREF holding is therefore not really different to any of the other higher risk elements. However, collectively the higher risk elements unbalance the portfolio and make it unsuitable. There is nothing to distinguish the BREF holding from the other higher risk elements other than its poor performance. I therefore not consider I should exclude the BREF holding from the redress calculation. K821x#12
The ombudsman service looks at each complaint on its own individual merits. It is not surprising that a range of consumers will have a range of suggested indices to calculate the notional return referred to earlier. It remains my view that for Mr A the APCIMS stock market growth index on a total return basis is the most appropriate comparator. I am satisfied that Mr A was prepared to invest a very significant proportion of his fund in equities or assets of broadly similar risk (and return) in order to achieve his required return. Before becoming a client of the business Mr A received a report setting out what the broad asset allocation of the portfolio would be. It is clear from this proposal that Mr A s fund would have a very substantial exposure to equity and equity like risk investments. He was looking for growth from his investments rather than income. Mr A had a very specific expectation of what he would like his portfolio to return which was 7.5-8% (net of fees). I consider that this sort of return expectation is consistent with the asset allocation of the APCIMS growth portfolio. Having considered these further representations I am not persuaded to change the conclusions given in my provisional decision. my final decision Therefore, my final decision is that the complaint against Tilney Investment Management should be upheld and that redress as set out in my provisional should be calculated and paid to Mr A. Michael Stubbs ombudsman 2
Copy of provisional decision complaint Mr A had a SIPP portfolio managed by Tilney Investment Management. Mr A has complained about the holding of the British Real Estate Fund (BREF) in his SIPP portfolio. He considers that it was too high risk for his portfolio and gave rise to a considerable loss. background This complaint was investigated by one of our adjudicators who considered that the complaint should be upheld. It was his view that the portfolio had an excessive exposure to high risk elements such that it was unsuitable for a medium risk investor like Mr A. Tilney agreed with these conclusions and offered redress to Mr A calculated by reference to what the portfolio should have been worth if it had been properly invested. However, this calculation left out the BREF holding on the grounds that the amount invested in this fund was not inappropriate. The adjudicator did not agree and asked the business to revise its calculation. He said that it was wrong to exclude the holding in BREF from the calculation. The adjudicator said that the correct approach was to say that the portfolio as a whole was 'unbalanced' and therefore unsuitable for a medium risk investor. Therefore, the entire portfolio should form the basis of the redress calculation, with no deduction for individual assets or sectors that were, correctly or not, judged to be in order. He asked for the calculation to be based on a notional investment of the original sum in the APCIMS Balanced Portfolio on a total return basis, adjusted for any additions and withdrawals during the period from May 2006 to May 2009. The business did not agree. It said that the circumstances here required special consideration because Mr A's complaint focused on the holding of BREF. Tilney said that following discussions with the Financial Services Authority (FSA) about how such cases should be reviewed, it had been accepted by the FSA that Mr A's holdings in BREF was not unreasonable or unsuitable. It said that the overall investment performance of Mr A's account would have been greatly influenced by the failure of the BREF fund and so it was logical to strip it out when assessing the loss. To follow the adjudicator s recommendation would be to refund 100% of the BREF investment. The business therefore asked for this complaint to be referred to an ombudsman. my provisional findings I have considered all the available evidence and arguments to decide what is fair and reasonable in the circumstances of this complaint. A medium risk portfolio does not necessarily have to be comprised entirely of medium risk investments. It can legitimately contain some exposure to higher risk elements. However, such an exposure should be relatively limited and should, depending on the precise level, be balanced by lower risk elements such as cash and fixed income securities. The business accepts that Mr A s portfolio was not suitable for the agreed medium risk mandate. The 3
remaining question is therefore how to calculate appropriate redress and specifically how should the holding in BREF be treated. Mr A s portfolio was unsuitable. Whilst the holding in BREF did not by itself cause the unsuitability, the holding (and its size) was one of the contributory factors. When a portfolio is rendered unsuitable the normal approach of the ombudsman service is to calculate redress on the basis of the whole portfolio ie to compare the value of the actual portfolio to the value of a notional portfolio based on the performance of an appropriate benchmark. The business agree in general terms with the above but has said that the holding in BREF should be excluded from the calculation. They say this because Tilney has undertaken a proactive review and offered redress to clients who had been found to have an excessive exposure to BREF. It considers that as, in Mr A s case, the BREF holding was not excessive it should be excluded from the calculation. I do not accept this argument. A portfolio could be made up of a sufficient number and size of high risk investments such that the portfolio is not consistent with a medium level of risk. However, when the high risk holdings are looked at individually there might be nothing wrong either with the fact that the high risk holding was in the portfolio or the size of the holding. Whilst there may be nothing wrong with the BREF holding when looked at in isolation, it cannot reasonably be excluded when calculating redress which is intended to compensate Mr A for having an unsuitable portfolio. The BREF holding, whatever its size, will have contributed to the unbalancing of the portfolio and therefore cannot reasonably be excluded from any redress calculation. Tilney must calculate redress by comparing the amount invested in the portfolio with the value this sum would now be worth if it had performed in line with the APCIMS growth portfolio on a total return basis (ie to include income). Adjustments should be made for any additions or withdrawals during the period from May 2006 to May 2009. Why is this benchmark suitable? Mr A s objective was to achieve growth. In terms of investment objective he selected growth from three options of income, balanced and growth. The business benchmark the performance of their portfolios against the relevant APCIMS index and so I consider it reasonable to assume that whilst Mr A s portfolio would not exactly match the relevant index it would be his expectation that the portfolio would be reasonably close in composition to this benchmark. On that basis I consider it reasonable to calculate redress on the basis of the performance of the APCIMS growth index rather than the balanced index. This more accurately reflects Mr A s objective when asking the business to manage his portfolio. The business must also pay interest on the loss calculated above at the rate of 8% simple (the rate payable on court judgements) from the date at which portfolio was transferred away from Tilney to the date of this decision. The payment should be paid into Mr A s SIPP. If the payment cannot be paid into the SIPP then it should be paid direct to Mr A after the deduction of tax. 4
my provisional decision My provisional decision, therefore, is that the complaint should be upheld and that redress as set out above should be paid to Mr A. 5