The Financial Ombudsman Service (FOS) has ordered advice firm Sussex IFA to compensate a former client after it gave unsuitable advice to open a SIPP, which was used to invest in failed property scheme Harlequin.
In early 2010, a client – designated ‘Mr F’ by the ombudsman – was introduced to Sussex IFA by a third-party adviser. At the time, he needed a regulated business to facilitate the transfer of his existing personal pensions to a self-invested personal pension (SIPP).
A few months before the advice was given, Mr F had paid a £1,000 reservation fee to unregulated investment scheme Harlequin to reserve an off-plan commercial property development in the Caribbean.
Harlequin required an initial deposit of 30% (£39,000) followed by the remaining 70% (£91,000) on completion. Mr F wanted to transfer his existing pensions to a SIPP and use his SIPP to fund the initial 30% deposit.
Mr F was in his mid-50s, single and employed with a salary of around £20,000. He owned a home with an outstanding mortgage, owned a buy-to-let property and had savings of around £20,000. He was said to have a “speculative” attitude to risk, suggesting he was happy to take on more risk for potentially higher investment returns.
Troubled advice firm to pay out for 22 Harlequin complaints
Mr F said he wanted to achieve a yearly pension of £20,000 at age 65, and was “keen” to invest in Harlequin with his personal pension because he thought such an investment would provide a more realistic chance of achieving his target income.
Sussex IFA recommended Mr F transfer his personal pensions to a SIPP and provided general risk warnings. In May 2010, Mr F transferred three personal pensions worth just under £50,000 to his SIPP. Shortly afterwards, he used his SIPP to pay the 30% deposit on his investment with Harlequin.
Overall, Harlequin took about £400m of mainly pension investors’ money to develop villas in the Caribbean. Advisers – or ‘agents’ – who sold Harlequin earned commissions of up to 15% of the investment. The scheme ran into trouble in the years after Mr F’s investment, the villas were never built, and the investment is now worth nothing.
‘Harlequin not non-advised sale’
In September 2015, Mr F’s representatives submitted a complaint to Sussex IFA, which the advice firm rejected. Sussex IFA pointed out Mr F had a risk profile of 5 out of 5, which meant an “esoteric investment” such as Harlequin was “extremely suitable” for him.
The firm also argued he had always planned to invest in Harlequin, and had given advice four months after he had completed Harlequin’s application form and paid the £1,000 reservation fee.
When the complaint went to the FOS, a first adjudicator decided to uphold the complaint. They said Sussex IFA still had a responsibility to give suitable advice and could not take the £1,000 Harlequin fee as a non-advised sale.
Additionally, they said, the Harlequin investment was not suitable for Mr F, and, had he received suitable advice, he would only have lost his £1,000 Harlequin fee instead of taking such a risk with his pension.
Sussex IFA disagreed, arguing Mr F wanted to transfer his pension, did not want investment advice and had already committed to invest in Harlequin.
The case was then referred to a second ombudsman, Keith Taylor, who arrived at the same conclusion as the first adjudicator.
“Sussex had a duty to provide suitable advice and to act in the best interests of Mr F,” he said. “It couldn’t make a recommendation to set up a SIPP without considering the underlying investment. A SIPP is only an investment wrapper. It is not an investment in itself.”
The ombudsman said Sussex IFA should compensate Mr F by putting him as close to the financial position he would have been in had he not taken out the investment, including an extra £300 for trouble and upset caused.
This is not the first time Sussex IFA has had to compensate clients for advice related to Harlequin. Between November 2017 and November 2018, the firm had to pay compensation three former clients for its role in facilitating investments into the unregulated scheme.