Coutts, the RBS-owned UK private bank and wealth-management firm, has been ordered to pay compensation to a couple who they wrongly advised to invest in an offshore bond deemed too “high-risk” for their needs.
The bank confirmed to International Investment that they had been ruled against by the Financial Ombudsman Service over the £400k investment made in 2007.
The Ombudsman, which was given statutory powers in 2001 by the Financial Services and Markets Act 2000 to help settle disputes between consumers and UK-based financial services firms, ordered Coutts to “put the investors back into the position they would have been in had they not invested in the offshore product” a decade ago.
The investors in this case are a married couple known only as Mr and Mrs W.
The decision, reached last month, mirrored a previous adjudicator’s findings that the investment adviser had failed to observe the couple’s wishes to have their capital protected, which Coutts had appealed.
The bank’s own suitability assessment identified that the couple’s wish was that their assets would grow, at the least, in line with inflation but that, crucially, they also wanted long-term capital growth and income protection in real terms.
An ‘unsuitable’ level of risk
As such, the scheme that Coutts advised the couple to invest in was ruled “unsuitable”, and it was on this point that Coutts’ appeal failed.
Coutts devised a £1.5m portfolio for the couple that “did not have any capital security but significant equity content with 40 per cent of this in hedge funds”, the ombudsman said.
Part of the portfolio included a Clerical Medical offshore bond.
At a meeting in 2009, when the couple expressed concern about the performance of their portfolio, Coutts switched their investment from what it called the ‘wealth enhancement’ portfolio to the ‘wealth preservation’ one, which came with a lower risk profile, said the ombudsman.
This, it said, underscored the argument that the couple had been pressed into a higher-risk investment against their wishes, leaving the bank liable for losses made as a result of that advice.
Coutts appealed against the findings, saying that the switching to the lower-risk portfolio meant that the couple had been exposed to an acceptable level of risk.
Furthermore, the bank argued, it was exempt from the Financial Conduct Authority’s review of advice failings at Coutts because “a skilled person appointed by Coutts at the time had concluded the advice was suitable”.
The ombudsman did not accept the bank’s defence, saying: “The FCA’s decision not to enforce a general review of this particular product has no bearing on whether it was suitable for Mr and Mrs W’s particular circumstances and objectives.
“Equally, while Coutts may have asked a ‘skilled person’ to review this investment it does not, and cannot mean this service should not assess whether this was a fair and reasonable recommendation in line with our obligations.”
‘Inherent risk’ in the offshore bond
The risk inherent in the offshore bond posed was contra-indicated by the suitability report, said the ombudsman.
For that reason, he upheld the adjudicator’s decision to order compensation and imposed 8% simple interest per year on any loss from the end date of the investment to the date of settlement in 2012.
A Coutts spokesperson told International Investment that, while it could not comment on specific cases, it “frequently reviews the wealth management advice it provides to clients to ensure it is aligned to the highest industry and regulatory standards”.
“This has included a past business review to remediate any unsuitable investment advice provided historically which was undertaken at the request of the FCA and overseen by a Skilled Person.
“The review concluded in 2016 and clients have been offered redress where appropriate. Coutts’ Advice Model aims to provide professional wealth management advice that is highly geared to meet the complex investment and structuring needs of private clients across the UK.”