Brendan Burgess
Founder
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From the Ombudsman's [broken link removed]
A husband and wife who invested ¤150,000 in a Unit Linked Fund found that after three years
their investment was worth less than ¤40,000. The Fund was a UK Property Fund.
The Complainants alleged that the investment was inherently unsuitable for their needs in
that they had specified a low-medium risk. The Ombudsman found that the investment was not in
itself unsuitable. However, the reason for the disastrous fall in the value of the investment was that
the money was invested in a Geared Property Fund where the property which had been purchased
by the Fund had been funded using 75% of Bank borrowings and only 25% of investors’ equity.
The effect of this ‘gearing’ was that if the value of the property increased, it would be advantageous
to the investor. However, if the value of the property was to fall this would have a disproportionate
and disastrous effect on the value of the investor funds. This is what happened. The Complainants
alleged that they had had no idea what ‘gearing’ meant in this context and that the Bank should have
informed them of ‘gearing’. The Bank stated in its defence that these customers had been properly
informed at two meetings which had taken place between officials of the Bank and the customers.
The Complainants denied this.
There being a total conflict on the written evidence as to what was said at the meetings in
question, the Ombudsman decided that an Oral Hearing was required in order to resolve the
conflict of fact which had arisen. At the Oral Hearing, both parties were represented by counsel and
evidence on oath was given by all the parties present at the meetings and they were cross-examined
on their evidence.
Having reviewed the Oral Hearing evidence and taken all the written submissions into account,
the Ombudsman concluded that the crucial question in the case was whether the Bank had wrongfully
failed to disclose risks associated with the geared nature of the Fund to the Complainants at the
moment of sale. After considering all the evidence, especially the evidence given at the Oral Hearing,
the Ombudsman said that “it was perfectly obvious that whereas recourse borrowing had been explained in
some detail, the implication of ‘gearing’ to this investment was not explained at all”. ‘Gearing’ in this context
means that with a decline in the value of the property, the value of the investment will fall further
and faster than the market value of the property itself. If there had been no ‘gearing’ then the fall in
the value of the investment would be the same as the fall in the value of the property itself. However,
he found that this complicated method of financing this particular investment had not been explained
to the Complainants and he was satisfied from the oral evidence that if it had been pointed out in
such stark detail, which it should have been, then the Complainants would not have invested in this
product at all.
However, in apportioning blame, the Ombudsman also referred to the brochure which had said
“‘gearing’ by its nature may increase the potential returns from an investment such as this but it also increases the
risk associated with the investment and in a worst case scenario, investors could lose all of their investment”.
The Ombudsman felt that the Complainants (who had had the general summary of the brochure)
had not read into the brochure in detail and beyond the general summary and if they had, prudent
investors would have come across this passage and it may have affected their decision.
financial 52 services ombudsman
Nevertheless, the Ombudsman was satisfied that the greater onus is on a Bank when advising
clients and Bank advisors need to be clear and straightforward in explaining every nuance of an
investment policy to people who are going to invest their money. Accordingly, the Ombudsman found,
on the balance of probabilities, that had there been an explicit verbal discussion of the downside risks
associated with ‘gearing’, the Complainants would not have proceeded with their investment in this
Fund. However, the Complainants, for the reasons stated above, had to carry some of the blame for
the loss that had been incurred because they did not read the brochure in great detail, this being a
contributory factor in mitigating the loss. The Ombudsman assessed this at 40%.
The Ombudsman therefore directed that the couple should surrender the Bond to the Bank after
¤90,000 in compensation for the breach of duty which occurred was paid.
Conflict
A husband and wife who invested ¤150,000 in a Unit Linked Fund found that after three years
their investment was worth less than ¤40,000. The Fund was a UK Property Fund.
The Complainants alleged that the investment was inherently unsuitable for their needs in
that they had specified a low-medium risk. The Ombudsman found that the investment was not in
itself unsuitable. However, the reason for the disastrous fall in the value of the investment was that
the money was invested in a Geared Property Fund where the property which had been purchased
by the Fund had been funded using 75% of Bank borrowings and only 25% of investors’ equity.
The effect of this ‘gearing’ was that if the value of the property increased, it would be advantageous
to the investor. However, if the value of the property was to fall this would have a disproportionate
and disastrous effect on the value of the investor funds. This is what happened. The Complainants
alleged that they had had no idea what ‘gearing’ meant in this context and that the Bank should have
informed them of ‘gearing’. The Bank stated in its defence that these customers had been properly
informed at two meetings which had taken place between officials of the Bank and the customers.
The Complainants denied this.
There being a total conflict on the written evidence as to what was said at the meetings in
question, the Ombudsman decided that an Oral Hearing was required in order to resolve the
conflict of fact which had arisen. At the Oral Hearing, both parties were represented by counsel and
evidence on oath was given by all the parties present at the meetings and they were cross-examined
on their evidence.
Having reviewed the Oral Hearing evidence and taken all the written submissions into account,
the Ombudsman concluded that the crucial question in the case was whether the Bank had wrongfully
failed to disclose risks associated with the geared nature of the Fund to the Complainants at the
moment of sale. After considering all the evidence, especially the evidence given at the Oral Hearing,
the Ombudsman said that “it was perfectly obvious that whereas recourse borrowing had been explained in
some detail, the implication of ‘gearing’ to this investment was not explained at all”. ‘Gearing’ in this context
means that with a decline in the value of the property, the value of the investment will fall further
and faster than the market value of the property itself. If there had been no ‘gearing’ then the fall in
the value of the investment would be the same as the fall in the value of the property itself. However,
he found that this complicated method of financing this particular investment had not been explained
to the Complainants and he was satisfied from the oral evidence that if it had been pointed out in
such stark detail, which it should have been, then the Complainants would not have invested in this
product at all.
However, in apportioning blame, the Ombudsman also referred to the brochure which had said
“‘gearing’ by its nature may increase the potential returns from an investment such as this but it also increases the
risk associated with the investment and in a worst case scenario, investors could lose all of their investment”.
The Ombudsman felt that the Complainants (who had had the general summary of the brochure)
had not read into the brochure in detail and beyond the general summary and if they had, prudent
investors would have come across this passage and it may have affected their decision.
financial 52 services ombudsman
Nevertheless, the Ombudsman was satisfied that the greater onus is on a Bank when advising
clients and Bank advisors need to be clear and straightforward in explaining every nuance of an
investment policy to people who are going to invest their money. Accordingly, the Ombudsman found,
on the balance of probabilities, that had there been an explicit verbal discussion of the downside risks
associated with ‘gearing’, the Complainants would not have proceeded with their investment in this
Fund. However, the Complainants, for the reasons stated above, had to carry some of the blame for
the loss that had been incurred because they did not read the brochure in great detail, this being a
contributory factor in mitigating the loss. The Ombudsman assessed this at 40%.
The Ombudsman therefore directed that the couple should surrender the Bond to the Bank after
¤90,000 in compensation for the breach of duty which occurred was paid.
Conflict