The power to settle financial complaints.
The power to settle financial complaints.
A consumer with a mixture of investments may choose to ask an investment manager to manage their holdings. The types of investment that a consumer might ask a manager to manage are varied. For example, they might include cash, fixed interest securities, shares, unit trusts and investment trusts.
When a consumer chooses a manager to run their portfolio of holdings, an agreement is made about what type of service the manager intends to provide. This agreement sets out both the responsibilities and limits of the manager when managing the portfolio.
There is no standard or uniform way in which a portfolio-management agreement is written. But its aim should be to set out clearly the way in which a portfolio is to be run.
Complaints we see relating to portfolio-management agreements often turn on the particular wording of the agreement in question – and on whether the manager has carried out its role as portfolio manager in accordance with that wording.
We see complaints about the following two types of portfolio-management agreement:
Under this type of agreement, the consumer gives the manager authority to buy and sell holdings in their portfolio without first gaining the consumer’s consent. The agreement sets out the boundaries within which the manager will manage the portfolio.
Central to the agreement is how much investment risk the consumer wants their portfolio to be exposed to. For example, the investment risk agreed may be described simply as "medium risk".
Alternatively, the level of risk agreed may be described in more detailed terms – by listing the types of investment that the portfolio should contain. For example, the agreement might state that shares to be considered for inclusion in the portfolio will be listed on the FTSE 350 index, government bonds and corporate bonds.
Some agreements state the intended proportion of the portfolio to be invested in different categories of risk. So for example, an agreement might state that the aim is to invest 50% in low-risk assets and 50% in medium-risk assets.
Another objective often written into the agreement is whether the consumer wants to achieve capital growth, income, or a mixture of the two. A target income amount might be agreed.
Other aims of the portfolio which might be included in the agreement relate to areas of economic activity that consumers might want the manager to invest in – or alternatively, areas the consumer wishes to avoid.
As examples, the agreement might state that the consumer is keen to invest in the shares of pharmaceutical companies – or that the consumer wishes to avoid shares in tobacco companies.
Under these agreements, the manager makes recommendations to the consumer about which holdings it considers should be bought or sold within the consumer’s portfolio. But the manager can only carry out these transactions with the consumer’s permission.
Under advisory managed agreements, the manager is responsible for both monitoring and providing advice about the overall suitability of the portfolio. The consumer then chooses whether or not to accept the manager’s advice.
An investment risk-profile will be agreed for the consumer. Often the consumer’s requirement for capital growth and/or income will also form part of the agreement. There may be specific requirements written into the agreement about the types of assets that the consumer does or does not wish to invest in.
The activities of the stock market itself are subject to the rules and regulations of the Stock Exchange. Complaints about stock market activities – for example, prices quoted by the market – should be referred to either the relevant stock exchange or the Financial Services Authority (FSA) as appropriate.
A company registrar maintains the shareholder list for their company. As this is not a "regulated" activity, we cannot deal with complaints against registrars relating to this particular activity. But some registrars also offer share dealing services, which is a regulated activity.
While other parties are involved in the purchase of the shares, for example, market makers, they do not have a customer relationship with the consumer and so complaints cannot be brought to us about these other firms, even though they are regulated.
Consumers bringing complaints to the ombudsman service have sometimes been classified by their broker as "professional clients". (Note that before November 2007 a different system of client classification was in place. The equivalent term in the old rules is “intermediate customer”.)
This classification is intended for consumers who are experienced in stocks and shares transactions. The signed agreement states that a "professional client" cannot bring a complaint to the Financial Ombudsman Service.
Where an individual classified as a "professional client" brings their complaint to us – and the broker then states that we cannot look at the complaint – we will consider the evidence and decide whether we need to investigate further whether the consumer was appropriately classified.
We may decide that the classification was not an accurate description of the consumer. In these circumstances we can then investigate the complaint.
We sometimes see complaints where the consumer’s initial dissatisfaction results from their portfolio falling in value. The value of a portfolio that contains assets with prices that fluctuate daily (such as shares) will rise and fall.
The fact that a share, or group of shares, may perform poorly does not necessarily mean that a broker or portfolio manager has been negligent when choosing that investment.
Poor investment performance in itself is not grounds for a complaint that we will uphold. However, while poor performance often triggers the complaint, further investigation may reveal issues about suitability.
The cases we see about portfolio-management agreements generally involve the consumer complaining that:
A consumer should be recommended an investment portfolio only when it is suitable for their financial aims. Where the evidence suggests that an investment portfolio was not suitable for a particular consumer, it is likely we will uphold the complaint.
We will also look carefully to see whether the consumer sufficiently understood the basis on which the portfolio was to be managed and its aims.
Cases we see about the administration of portfolios include complaints from consumers that:
We consider each complaint on its own facts, taking into account both parties’ account of events.
Where the complaint relates to delays in transferring a portfolio’s holdings, we assess within what time period we consider it would have been reasonable for a manager to have arranged transfers – taking into account the types of asset involved and good industry practice.
Similarly, if some holdings have not been transferred, we will consider the reasons for that – and whether this is the fault of the manager.
For complaints relating to charges, we look at the terms and conditions of the portfolio, to decide whether the manager has applied charges on the basis that it said it would. We also consider whether the charges applied were reasonable.
The value of a portfolio is likely to fluctuate in line with market conditions. But where there is a dispute about valuations provided by the manager, we investigate whether the manager has been at fault. If so – although we would not normally expect a manager to honour a valuation that was incorrect – we might tell the manager to pay compensation for any distress or inconvenience that has been caused to the consumer.
Cases we see about the management of investments in a discretionary portfolio include complaints from consumers that:
In these cases, we look at portfolio valuation-statements to decide whether the assets held were consistent with the requirements of the consumer – as set down in the discretionary agreement. We pay careful attention to the wording of the agreement, as this is sometimes tailored very specifically to the individual consumer’s needs.
We also consider whether or not the evidence shows the consumer had sufficient understanding of the basis on which the portfolio was to be managed – and whether the discretionary basis agreed was suitable for their circumstances.
There is more information about our approach to assessing these issues in the section of our website on assessing the suitability of investments.
When we look at portfolio valuations, we take into account the overall level of risk that all the assets held represent. A consumer may have requested that a portfolio be managed on a "medium risk" basis. But this would not make it unreasonable for the manager to buy some lower and higher risk investments, to maintain an overall medium risk – unless the discretionary agreement stated otherwise.
However, an excessive proportion of holdings that were not medium risk in such a portfolio could result in the overall balance of the portfolio ceasing to be medium risk.
Where a complaint relates to a discretionary agreement that specified the exact proportions of the portfolio to be invested in low, medium and high risk investments, we assess whether the manager has succeeded in maintaining the investment balance requested by the consumer.
We will also investigate whether the portfolio has been managed in accordance with any instructions in the agreement to invest – or avoid investing – in certain sectors of the economy.
Taking into account any specific restrictions like these, we assess whether the portfolio is sufficiently diversified – or whether it is overly reliant on the performance of particular parts of the economy, or on particular geographic regions.
In any assessment of risk levels, we look at whether the manager was supposed to be balancing the risk of the funds managed within the portfolio against the risk of other financial assets held by the consumer. If the risk of assets outside the portfolio was to be taken into account by the manager, we would expect this to be clearly documented.
Many of the complaints we see about investment advice provided under non-discretionary portfolios relate to the suitability of advice to buy or sell a share.
The consumer may feel that the share recommended was not appropriate for their attitude to investment risk – or that the strengths and weaknesses of the company which the shares were in were not all made clear.
In these cases, we look at whether the level of risk relating to the recommended share was suitable – and at how it was represented.
Under advisory managed agreements, the manager is obliged to monitor the overall suitability of the portfolio – and we see complaints that managers have failed to do this. We investigate whether the manager’s recommendations unbalanced the consumer’s portfolio to the extent that the overall risk-profile of the assets held was no longer consistent with what was required.
We see cases where the consumer complains that over a period of time the manager has not carried out enough purchases and sales (under discretionary agreements) – or has made too few recommendations (under non-discretionary agreements). The consumer may feel this has decreased the opportunities for their portfolio to increase in value.
Other complaints we see are the reverse of this – where the consumer feels there has been excessive trading of assets.
With complaints about the lack of trading in a portfolio, the consumer may feel their portfolio has been "neglected", or that the manager has simply failed to take advantage of buying and selling opportunities.
In these cases we look at the reasons the manager gives as to why it did – or did not – make changes or recommendations during the period in dispute. Depending on circumstances at the time, it can be a reasonable approach to avoid changing the assets held in a portfolio. But we would expect the manager to be able to justify why this was the case.
Where the complaint relates to excessive changes in the portfolio’s holdings, and we think trading activity is higher than we would expect, we ask the manager to give an explanation for this. We also look at whether the strategy agreed between the consumer and manager for the portfolio was to carry out regular trades like these, to achieve short-term profits on individual shares.
A strategy like this increases both trading costs and the level of investment risk – because share investment is generally seen as being for the long term, to avoid short-term fluctuations. So we assess whether this type of strategy was required by the consumer, understood by them, and whether it represented a suitable strategy for their attitude to investment risk.
If we decide that a manager has caused a delay in transferring assets from an existing to a new portfolio, we will look at whether this has caused the consumer financial loss.
If it has, we will usually tell the manager to pay compensation to put the consumer in the financial position they would have been in, if the transfer had been carried out within a reasonable period of time.
If a manager has applied charges outside those permitted in its terms and conditions for the portfolio, we tell it to pay a sum equivalent to those overpayments – together with interest.
Poor administration does not always result in a consumer suffering financial loss. But it may still cause inconvenience or even distress. In cases where we consider a consumer has suffered material distress or inconvenience as a result of a manager’s errors, we tell the manager to compensate the consumer on the basis of our usual approach to compensation for distress, inconvenience or other non-financial loss.
If we decide to uphold a complaint, our aim is to put the consumer back in the financial position they would have been in, if the manager had run the portfolio appropriately.
In some cases we decide that the consumer should never have been advised to start an investment portfolio, as their attitude to risk or their financial aims were not consistent with the use of a portfolio.
In these circumstances, if we can determine where the consumer would have put their money if they had not invested in the portfolio, we are likely to tell the manager to compensate the consumer – by putting them into the position they would have been in, if they had invested in that alternative asset.
If we cannot reasonably say where the consumer would have put their money, we are likely to tell the manager to repay the initial amount invested – together with a sum reflecting the consumer’s lost opportunity for investing elsewhere.
We sometimes tell the manager to calculate how the sum of money invested would have performed if it had been used to buy a different share, or a different group of shares.
In cases like this, the inappropriate share or shares may be compared to the performance of an appropriate alternative investment. Or we might compare the performance of the inappropriate shares to the performance of the remaining suitable part of the portfolio.
However, it is often not possible to say with sufficient certainty which particular shares would have been invested, if the manager had made appropriate recommendations (for non-discretionary portfolios) or appropriate purchases (for discretionary portfolios).
In these cases, we will normally ask the manager to compare the actual performance of the portfolio with the performance of a particular index. The index we choose will depend on the circumstances of the case.
Although we may decide that investments were unsuitable for a portfolio, a comparison with a suitable index or other suitable investments may result in no financial loss being identified. No redress for financial loss would then be due.
But compensation might still be appropriate if the manager’s actions had caused the consumer material distress and/or inconvenience.
If we decide that a manager’s actions have resulted in excessive trades occurring in a portfolio, we may require the manager to refund to the portfolio the excess charges that it has incurred as a result of this activity.
We will also look at whether the trades themselves were in line with the consumer’s financial aims and attitude to investment risk. Where they were not, we may tell the manager to re-model the portfolio as if the excessive trades had not occurred.
If we decide that a portfolio’s holdings were not reviewed sufficiently by a manager – and so its trading frequency was inappropriately low – we usually compare the value of the portfolio to an index. This is because it is reasonable to assume that the movement in the value of the index would broadly reflect the value of a portfolio that had been monitored for its suitability more regularly.
In all cases where we consider the manager to have been at fault, we will consider whether this has caused the consumer any material distress and/or inconvenience for which the manager should compensate the consumer.
FSA letter to firms involved in the wealth management industry to outline areas of concern following a review of the suitability of client portfolios.
contact our technical advice desk on 020 7964 1400
This is part of our online technical resource which sets out our general approach to complaints about a wide range of financial products and issues. We would like your feedback on how helpful you found it. Please also use the feedback form below to tell us about anything you think we could clarify or explain better.