Whilst they may not always agree with the decisions they reach on suitability of advice issues, financial firms are used to the Financial Ombudsman Service (FOS) making adjudications of this nature on complaints made about them.
But now it seems that the FOS has entered previously uncharted waters by ordering a firm to pay almost £30,000 in compensation to two clients on the grounds that the commissions taken were too high.
The case concerns two sales of Self Invested Personal Pensions (SIPPs) sold by Berkshire-based D M Cager Ltd in 2008. In its ruling, the FOS said that the commission amounts taken during the first 12 months of the policy were too high, and that other products with low charges, such as stakeholder pensions, could have been more suitable.
D M Cager asserted that the commission payments were also to cover other work they were carrying out, besides arranging the SIPP, but the FOS countered by saying that this was not explained in the client agreement. The firm also say that the clients agreed to the commission levels, and that the option of paying for the advice via a fee was offered.
In his adjudication, Ombudsman Roy Milne said: “I am not satisfied a pension with high initial charges was suitable because if the contributions stopped before the selected retirement age, the effect of those charges would be significant.”
D M Cager’s managing director Martin Dubber reacted to the adjudication by saying: “It is not the role of the ombudsman, several years later, to decide if the figure was too high.”
However, he added that his firm would be unable to contest the decision as the costs of a judicial review would be too high.
Initial reaction from financial advisers on the Money Marketing website was mixed. One said that “taking £30k commission is simply a rip off and you ‘reap what you sow’ doing things like this,” while another referred to the FOS’s actions as “a blatant abuse of power.”
It remains to be seen how the FOS will react in future cases of a similar nature. Commission payments are of course no longer permitted for pension and investment sales, but advisers must make sure that their fees are clearly explained at the start of the advice process, and that the level of fees charged reflects the costs of the work carried out on the case. In a recent thematic review, the regulator, the Financial Conduct Authority, found that 73% of firms surveyed were not properly explaining the costs of advice.