A Financial Ombudsman Service (FOS) decision has shed light on the advice at the heart of Towergate’s £85 million unregulated collective investment scheme (Ucis) compensation bill.
National advice firm Towergate Financial first revealed it faced a Financial Conduct Authority (FCA) investigation into its Ucis sales in May 2014.
The firm’s chief executive at the time, Warren Page, said the problems stemmed from the acquisition of a firm which was involved with Ucis but would not name the firm.
In February, Towergate then said that it set aside liabilities between £65 million and £85 million in order to pay customer redress.
Later that month the Towergate’s creditors bought out the company. In March, it sold its advice arm to Palatine Private Equity as part of a management buy-out headed by chief executive Warren Page and former chief executive Ian Darby, and was rebranded Wren Sterling.
However, the liabilities have remained with the insurance company.
A FOS decision made in July has revealed the firm and the advice behind the £85 million compensation bill.
The decision referred to advice given by Towergate Financial (East).The firm was previously known as M2 Financial Limited before it was acquired by Towergate in 2008.
In 2004, an adviser at the firm recommended ‘Mr B’ invest £35,000 from his £50,000 pension fund into Ucis property fund, the Babcock & Brown Foundation Property fund 1, which invested in UK property. He was told he could take an income of £1,500 per year from this investment.
Mr B expressed concern about investing 70% of his pension fund into one fund but accepted the advice.
In 2012, he had to sell another £9,000 investment in order to continue to pay the £800 per year Sipp fees to I.P.M. Sipp Administration.
In 2014, the Sipp provider suggested he should move to a lower cost provider. The fund was valued at £18,000 at the time. However, no other provider was willing to accept the investment.
Ombudsman Adrian Hudson said that Towergate’s own independent review into Ucis sales found that in this case Mr B had ‘insufficient knowledge’ to justify recommending the fund.
Towergate’s own review also found that the recommendation was unsuitable for a client in drawdown with a small pension pot because it was illiquid and over-concentrated in one fund, and added that an impaired life annuity might have been a better option.
The ombudsman agreed with this view and found in favour of Mr B. He ordered Towergate to pay compensation.
This will be calculated by comparing the value of the fund against the original value of the investment using the FTSE WMA stock market income total return index as a benchmark. The difference between the actual value of the fund and its ‘fair value’ if it had been invested differently will be the amount that is owed.
The compensation will be reduced by 20% to account for tax relief. It will also increase by 8% per year from the date of the decision.
Towergate will also have to pay £300 to Mr B for trouble and upset.
A Towergate spokesman said the company could not comment on individual cases but would compensate all clients affected by the firm’s advice.
‘Towergate takes its commitment to customers extremely seriously, and took immediate action to address any potential flaws in how the products were sold,’ he said.
‘We can’t comment on individual customer cases as we are carefully examining all of these historic cases, as agreed with the FCA using a third party.’