There have been a number of interesting FOS decisions during 2016. Below is a summary you may find useful.

    High risk pension transfer advice costs firm

    Circumstances: The client was offered an enhanced transfer value (of 64%) if he transferred out. After research the adviser told the client that the investment would need to grow by 8% each year to provide the same benefits the scheme would. The firm told the client that as a temporary measure the funds would transfer into cash and another adviser would advise him on the asset allocation and investment risk.

    • Seven years later it was discovered that the funds were still in the cash account and were never invested
    • The ombudsman felt that a critical yield of 8% each year was a high-risk transaction
    • The adviser has been told to pay £250 for distress and to compensate for any investment losses, using certain assumptions
    Lessons learnt
    • If you are firm with the pension transfer recommendations and transact business which has been referred to you via another IFA firm, you are responsible for the advice given. You need to be comfortable that the funds will be invested.

    Adviser told to pay up after recommending Sipp

    Circumstances: An adviser has been told to compensate a client after recommending a client transfer his £37k L&G stakeholder pension into a Sipp. The client’s objectives were to have flexibility in the investment choice and a more actively managed investment structure. Funds selected were cautious in line with his attitude to risk and not available via a stakeholder pension.

    • The ombudsman upheld the complaint saying the client didn’t need a Sipp and felt his objectives could have been achieved within the existing contract
    • Other cautious funds could have been selected within the stakeholder pension rather than move to a Sipp
    • While the recommended funds may have performed better, there are no guarantees, but what was certain was higher costs
    Lessons learnt
    • This is a useful reminder that internal fund switches must be considered
    • Be careful of shoehorning into the firm’s investment proposition

    Pension transfer ruled unsuitable due to high charges

    Circumstances: A firm has been told to compensate a client who transferred her Free Standing Additional Voluntary Contributions (FSAVC) to a personal pension plan (PPP). The client was age 55 and not working at the time of advice and was in receipt of some pension and rental income. The firm recommended she transfer the FSAVC to a PPP and pay in £300 pm with the intention of increasing her pension provision. The PP was recommended as it has 250 funds compared to 14 under the FSAVC. The adviser charged fees of 4% initial and 0.5% ongoing plus 50% of the new contributions in the first year.

    • The FOS felt the advice to start a new plan was unsuitable due to the upfront and higher product costs, suggesting that increasing the contributions to the existing plan was more suitable
    • It was a small fund and the growth rate required to overcome the effect of charges would be high
    • A comparison of the existing FSAVC should have been made with the new PP
    Lessons learnt
    • Advisers still need to sense check the initial fees that would be applied in its entirety and how this would impact the fund
    • A comparison of costs must be provided

    Firm under fire for bond and Isa switching advice

    Circumstances: The FOS has ruled a firm was wrong to tell a client to switch Isa and Bond provider, given the cost of advice and the penalty for closing his existing bond. The firm stated the client was made aware of their fees through many different documents provided to the client, of which the client signed. The suitability letter also included reference to the exit penalty of £1,884 incurred.

    • The ombudsman stated that she accepts that the client relied on the adviser’s comment that the charges he would incur would be broadly the same
    • While the fees were made clear in the paperwork, it was the firm's responsibility to ensure its recommendation was suitable, considering the charges he would incur
    • The firm calculated an annual saving from the switch of 0.41%, taking into consideration the bond penalty
    • So there was marginal benefit (approx. £270 pa) in transferring
    • However, the ombudsman said the modest annual saving needed to be considered against the immediate lump sum costs of £1,884 exit penalty and £2,200 adviser fee. As a result of this she did not think the marginal annual savings should have been a driver in the recommendation to switch providers
    • There appeared to be minimal discussion about the performance of the existing investments, or the past and anticipated performance of the recommended investments
    Lessons learnt
    • While the new contract may be cheaper than the existing contract, the impact of all charges needs to be considered.
    Read more: What does a good client file look like? Part 1 and part 2.

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