Gateshead firm Prism Financial Advice has been ordered to pay compensation by the Financial Ombudsman Service (FOS), after the Ombudsman concluded that the firm did not fully explain the implications of encashing an investment bond. It was apparently not explained to the client that, as a higher rate taxpayer, he would be subject to chargeable gains on the growth in the value of the bond.

Prism said that, on the basis of the information it held on the client, Mr J, it had every reason to believe he was a basic rate taxpayer. According to the firm, Mr J failed to respond to his adviser’s efforts to contact him in January 2016, shortly before he tabled his complaint. The suggestion here is that, had contact been made at this time, the firm may have been able to fully understand his updated tax position.

Prism accepted that it had been guilty of “communication failures”, and offered Mr J £500 in compensation, in addition to offering to reduce the initial advice fee for the bond from 3% to 1%.

However, it contested the main elements of the complaint, saying that the client only fell into the higher-rate tax band as he chose to work additional overtime, and that as a firm, it could not reasonably have been expected to know that he would become a higher-rate taxpayer.

However, after a final decision by ombudsman Tony Moss, the firm must now pay Mr J £3,889, in addition to the £500 it has already offered. The £3,889 figure is made up of the amount of the revised 1% advice fee, plus the tax liability incurred by Mr J on encashment. Additional compensation based on an interest rate of 8% must also be paid by the firm.

In giving his decision, Mr Moss also questioned whether the client had actually benefitted from being advised to encash his bond and take out a new investment. Mr Moss comments:

“The adviser makes highly generalised references to the existing investments no longer offering the benefits they once did without offering any specific concerns about the bonds in question. Equally, he offers no detailed explanation as to why the proposed new investments would deliver better growth potential etc.

“Crucially, the advisor does not explain why the existing portfolio could not be adjusted to potentially improve performance or provider greater flexibility etc. thereby avoiding encashment chargeable gains and new set-up charges. If Mr J had not been advised to go down this route he would not have incurred either a new set-up charge or a chargeable gain. He would have kept his original bonds and avoided both of these.”

Mr Moss adds that the firm failed to explain the potential tax liabilities in the suitability report that was issued to Mr J when the bond was taken out.

This case highlights several important points for advisory firms to consider:

  • When recommending that clients encash one investment product in order to invest the monies in another product, the transfer must genuinely benefit the client
  • Firms should make every effort to remain in contact with their clients, and to fully understand their changing financial situation
  • Suitability reports should highlight any tax issues associated with the products being recommended

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.