Help - FOS provisional decision on with-profits bond complaint

whoosh

I wonder if anybody could give me some advice. I successfully complained about a with-profits bond, on my mother's behalf, which an IFA sold to my mother early this decade. (The bond was with Scottish Mutual and was supposed to provide her with income to live on. As some of you will know SCM w/p bonds went belly-up. She had no other monies for income and was risk-averse, so the FOS upheld the complaint).

The FOS upheld the complaint and the Ombudsman said he was proposing to recommend redress paid at the BofE base rate, for the period that the money was invested in the bond. He
has issued a Provisonal Decision in favour of my argument that she would have moved her money around looking for the best no-risk deposit accounts, had she not sought financial advice (as indeed she would have).

I don't feel this is quite fair enough to my mother, and had argued at the least for base rate + 1%. However the Ombudsman while acknowledging this in his Provisional Decision letter, also said that he had to bear in mind that my mother didn't want to take any risk with her money.

I have a final opportunity to respond to the Provisional Decision. Can anybody make any suggestions as to how I can respond? I know that many deposit accounts like ING paid over the base rate during this decade and also that there may have been risk-free savings products that might have given my mother a good rate. I also think a good IFA might have done better for her.

Can anyone suggest any arguments in favour of redress being paid at base rate + 1% (or better) instead of the base rate alone?

I have tried looking for historical best-buy tables and ING's historical rates but without success.

Thanks in advance for any help you can offer.

turbobob

I have worked in complaints at an insurance company - mainly endowment complaint cases but did see a few WPB complaints as well. I don't recall being involved in any that went to FOS.

With most of these types of complaints I believe if it was upheld, the redress was a refund of the investment with a notional rate of investment return equivalent to BofE Base Rate +1%. This is based on FOS guidelines for redress in investment complaints - http://www.financial-ombudsman.org.uk/publications/technical_notes/QG5.pdf

Unlike interest, this is not subject to income tax deduction. See http://www.financial-ombudsman.org.uk/publications/guidance/comp_tax.htm

Is the redress being recommended by the Ombudsman a notional investment return or is it interest? (i.e. will it be subject to income tax?)

As it has gone to final decision stage, an Ombudsman can take a different view from any of their published guidelines.. It seems to me, it boils down to what your mother would have done if she had not been given the advice.

As it sounds like you've argued she'd have gone for deposit accounts, instead of some undetermined no risk investment, I think what the Ombudsman is recommending is probably fair - providing the investment return in the compensation is not subject to income tax. I'm not sure if the ING account would have beaten the Bank of England base rate over the period after tax was deducted from its interest? Perhaps something worth looking into anyway.

Milarky

The way I read that linked leaflet from FOS is that you get BOE+1% where they can't work out what the client would have done otherwise, but something vaguer than than ["[I]a rate equivalent to the interest paid on a suitable deposit account.[/I]"] where they boil it down to deciding there could not have been an alternative 'investment' to the deposit? And it seems that 'suitable deposit account' equal BOE rate. The '+1%' is notional real return from an investment not a deposit.

...this seems 'obvious' now but it is expressed badly I think...

how do we decide what would have been suitable advice?
In other cases, however, there may be no conclusive evidence as to what suitable investment would have been arranged, if the consumer had not taken out the unsuitable investment. In these cases, unless the circumstances indicate otherwise, we usually award redress on a notional capital return, equivalent to Bank of England base rates during the relevant period + 1%.

what about cases where suitable advice would have been not to invest?
In cases where we consider that the only suitable alternative investment would have been a deposit-type account, we are likely to award redress for being “deprived” of the money at a rate equivalent to the interest paid on a suitable deposit account.

Remember who set up the FOS - it was the banks etc - they work for them not us - so its conclusions are never knowingly severe on the firms whose subs pay for it..

turbobob

Milarky wrote: »

Remember who set up the FOS - it was the banks etc - they work for them not us - so its conclusions are never knowingly severe on the firms whose subs pay for it..

That is a view I've heard from complainants in the past (particularly the very difficult conspiracy theorist types, it has to be said....) :rolleyes:

It was in fact set up as a result of the Financial Services and Markets Act. AFAIK every authorised firm (that is IFAs, insurers, banks, brokers etc) in the country has to pay a levy towards them. In addition, for every case referred to them, the firm is charged a case fee. I'm sure all banks etc. would prefer it if they didn't have to pay these fees and did not have FOS overturning their decisions... And FOS overturns of decisions are quite common with some companies.

They are required by law to be impartial. They certainly are not consumer champions, as that is not their role. They will not make punitive awards. Punishment is the role of the FSA - however when they fine firms they/the government keep the loot, the customers don't get it.

Milarky

Yes, turbobob, it is true that whenever you complain to a firm and the firm has made a mistake the cash they pay comes out of the pockets of other customers..

The FOS however, only exists because of the FSMA. So it's not popular 'by demand' it's merely popular as a designated complaints handler. We still have the option to take the firm to court at the outset - but that's a hiding to nothing for most people.

As I suggested, the FOS owe their existence to an 'arrangement' between the firms and the state - that the state [in the person of the FSA - another quango that owes its existence the pork barrel approach to politics] will not come after them too hard if they accept it. But what qualifies the FOS to know and understand issues of fairness? I assume the answer is that they anticipate how a court would weigh the facts but equity doesn't make up for the repeated dissappointment people experience at the hands of so-call regulated firms. What consumers want (I'm afraid) is revenge - in the sense of making it so painful for a firm to have mistreated them as they have that they will never do it again to another customer (Remember the Monty Python waiter-waiter sketch?) And neither the courts (still far too unaccontable for their decisions) or the FOS are capable of such 'summary' decisions.

Finally, we have the disgrace of the FSA 'refusing' even to identify the firms on its blacklist for investigations. This is taking the 'rights of the suspect' to ridiculous heights when you consider the gross disparity of resources between individual firms and their indivdual customers. The FSA is the bigger culprit in my view - deploying a contemptuous attitude to the customers of the firms that ultimately pay their wages. Whilst it is possible to explain the conduct of the FOS in terms of court process the FSA simply acts like a state within a state. I would scrap the FSA, pay off all its executives and tell them to go back the firms whence they came (no conflicts of interest there eh?) and I would put the City under draconian Bank of England supervision. The Governor would also know that he had one chance and he was out....

dunstonh

The FSA is the bigger culprit in my view - deploying a contemptuous attitude to the customers of the firms that ultimately pay their wages.

For too long there has been a bias towards the banks from the FSA. Although that has changed in recent times.

I think the problem with the FSA is that they to micro manage the minor issues and take their eye off the ball on major issues. Whilst the benefits of TCF to consumers makes it a good idea, the amount of resources and the number of hoops you have to jump through (as a financial services company) is just ridiculous. Yet whilst that has been going on over the last 18 months or so they more or less ignored what was going on with mortgages the until it was too late.

There are also the conflicts you get between the FSA and the FOS which can make it awkward for regulated firms. For example, the FSA say the suitability report should be short, simple to understand and focus on the recommendation. The FOS on the other hand generally take the view that if it isnt documented, it didnt happen and would expect all the reasons why not (something else) was considered and documented. So, do you go by what the FSA want or do you protect yourself and your company by doing what the FOS want?

whoosh

turbobob wrote: »

I have worked in complaints at an insurance company - mainly endowment complaint cases but did see a few WPB complaints as well. I don't recall being involved in any that went to FOS.

With most of these types of complaints I believe if it was upheld, the redress was a refund of the investment with a notional rate of investment return equivalent to BofE Base Rate +1%. This is based on FOS guidelines for redress in investment complaints - http://www.financial-ombudsman.org.uk/publications/technical_notes/QG5.pdf

Unlike interest, this is not subject to income tax deduction. See http://www.financial-ombudsman.org.uk/publications/guidance/comp_tax.htm

Is the redress being recommended by the Ombudsman a notional investment return or is it interest? (i.e. will it be subject to income tax?)

As it has gone to final decision stage, an Ombudsman can take a different view from any of their published guidelines.. It seems to me, it boils down to what your mother would have done if she had not been given the advice.

As it sounds like you've argued she'd have gone for deposit accounts, instead of some undetermined no risk investment, I think what the Ombudsman is recommending is probably fair - providing the investment return in the compensation is not subject to income tax. I'm not sure if the ING account would have beaten the Bank of England base rate over the period after tax was deducted from its interest? Perhaps something worth looking into anyway.

Thanks Turbobob. To answer your question as to whether redress is being recommended as "a notional investment return or is it interest? (i.e. will it be subject to income tax?)" - I'm not sure, but the Ombudsman's wording uses the wording "compensation", to be based on a return of the original capital invested, less withdrawals etc, from time to time "by way of capital growth equivalent to BofE base rate compounded yearly from date of investment to encashment".

I'm not sure whether this is taxable although the FOS guidelines suggest not, although I believe there may be some capital gains liability (?)

Also, having done some web research, it seems plain that there were usually some deposit accounts paying around 0.5% above base rate at pretty much most times this decade. But I'm still wondering if she could have got better returns for low risk.

It's true that she did not want to take any risk with her capital, but since income was her priority she was happy to lock the money up for periods of time - that was a condition of the original w/p bond, obviously, which she never complained about.

There must have been some good fixed-rate 1-yr bonds or other products at various points in time that would have paid something like 1% above base rate with conditions like these, that would nevertheless not have put her capital at risk.

If any readers can suggest any, that would help. I have to get my final response to the FOS by end of this week.

This IFA was genuinely indifferent to her situation - couldn't care less that he'd locked up all her income-generating savings in the bond - and so, within the constraints of truthfulness and reasonableness, I'm keen to make as strong a case as possible in regards to compensation. It's not often the small saver gets the chance to prove that a greedy IFA made a wrong decision.