HSBC loses court battle over IFA's AIG fund advice

Doesn't make sense to me....wrong advice given and only £2 damages !!

I also find the comment about cash interesting. If HSBC did advise that the fund was 'like cash' then that would be poor. However, there is nothing like cash but CASH and i think this solicitor and ML wife probably did understand the risks. It's seems to me that the banks are talking rubbish to investors that should have known better !!!

I had a client who sold his business and I was 'pitted' against a CSFB wealth adviser in early 2008 who was recommending he invest all his sale proceeds in the Enhanced fund with AIG who were 'the biggest insurer in the world'.

My view was simple - why would you put all your money from your life's work in one place. The Enhanced fund factsheet showed what it invested in which clearly wasn't cash and had lots of asset-backed securities and there was a reason it was paying so much more than cash or the lower risk AIG Standard Variable Rate fund.

I won the client's business against CSFB and whilst we did put a modest chunk in the PAB SVR fund, we sold out of that fund with a profit during the chaos of Sept 2008. It was a hairy time however!

It was simple advice - don't put all your eggs in 1 basket and if it sounds to be good to be true then it is.

I have little sympathy for all involved in stories such as the above, they sound fairly sophisticated investors to me but what adviser would put so much of someone's capital in 1 product.

It does sound daft.....you may not have foressen what was going to happen but if you didnt want to risk your capital then it shouldnt have been put there.....the HNW adviser for banks sell just in the same way as the FPM's in the branch....they are just better at doing it I guess....

Bank should have known better; client should have known better. Could be why we ended up with an outcome of negligent advice and nominal redress. Odd case. Will be interesting to see how many more like this turn up!

Best advice to a 100% risk-averse client such as this would appear to be to put the money into 100% cash and nothing else.

That having said, I share DB's puzzlement over the judge's pronouncement that whilst HSBC's advice was negligent, it isn't liable for the consequences of that negligent advice. What, then, is the point of taking someone to court if they get let off the hook with a verdict like that?

Investing £1.2 million into one fund is a little bit on the crazy side! Not sure how HSBC could be found to be negligent without having to compensate the client. How much the client actually knew about the risk we will never know. What is fairly clear is that the adviser should have known about the risk, as that is his job! HSBC must have has some very good solicitors working on this case to get a £2 judgement like that!

The problem is that they just sell and dont give a to** about the advice ...heres a new product where you get an enhance commssion....designed for cautious clients....go and fill your boots....wonder what Coutts have come up with??

There's a control aspect that needs highlighting too. If the client puts all that chunk in to the one PAB product, that adviser was then gatekeeper to move the monies out in to more lucrative products as well but was earning trail in the meantime...

I wonder what the Suitability Letter said and if the client signed it, like mine do. That would have clarified the situation rather more prompty than a court case.

Adviser A - sells the 'low risk' Keydata plan to a client. Outcome - serious brown stuff hitting fan. Result - FSA wakes from slumber, blames everyone, hands out massive fines.

Adviser B - sells the 'low risk' AIG fund to client. Outcome - serious brown stuff hitting fan. Result - judge gets seriously upset, blames multi-national bank for dreadfully bad advice and hands out massive fine. All £2 worth.

All seems perfectly in order to me...

Does this mean that all the other advisors who lost money for their clients in the AIG Enhanced Fund can now claim absence of foreseeability as a defence? Can this be extended to endowments, Keydata and Lehmans-backed products?

As PP points out, this clearly wasn't a cash equivalent - surely a bank the size of HSBC must employ someone in a research or technical capacity who is able to spot this before it's available to their own advisors?

I can see this one running and running.

HSBC tried to say that it was execution only because they hadnt sent the Know your Customer documentation ???? Do they mean that they adviser hadnt identified the customer before he had signed on the dotted line .....money laundering issues??? Looks like this is one hell of a mess that HSBC has gotten into. The adviser has jumped ship before he was pushed to COUTTS???? Ha ha ha wonder wht he is selling at COUTTS ? TAX MITIGATION PLANS?

Any idea why this case was at the high court and not the FOS?

I have long maintained that 'normal' justice is suspended for our industry and this seems to prove my point.

This judgement may well set an important legal precedent, though whether or not, in similar cases, the FOS will take the slightest notice is an altogether different matter. MoK's comments/questions are very pertinent.

Mortgage-related endowments were sold on a massive scale without proper consideration having been given to possible alternatives (all of which would have generated considerably less commission). However, not only could advisers not have been reasonably expected to foresee what would become of With Profits as an investment medium, in no small measure due to the brutal reforms imposed by the FSA with its customary zealous disregard for the collateral damage that would result, they were genuinely unaware of the incorrect basis for illustrations laid down by LAUTRO. So where are the root causes of so many endowments now coming up short at maturity? Who is responsible?

Well, in the eyes of the FSA, as usual, the fault lies totally at the door of the intermediary community and we must be made to pay accordingly for our sins. The true picture is somewhat different.

Slightly off topic: Have you ever tried spell-checking "Coutts" on your Word programme? Go on, try it and see what you get...quite funny!

FOS maximum award is £100,000.

basket , eggs ' the same old story

I'd hazard that the reason for the £2 award is that the judge recognized that these were sophisticated investors - you wouldn't class a former director of Merrill Lynch as a retail client IMHO. They should have known better than to put so much into a single fund.

They also should have known better that to go to a bank!

However, HSBC have clearly messed up big time. The adviser in question should have the full force of the FSA investigating every bit of business he has written, and if anything similar has occurred again, he should be struck off.

Equally the FSA should investigate HSBC's procedures - being happy to accept that amount of business without having completed a factfind etc beggars belief.

The thing is people will go to HSBC and Coutts and think that they are getting the very best advice when infact they are getting in front of the very best salesmen......

It's mildly interesting to note that this particular case doesn't seem to have been transacted on excessive commission ~ just good old fashioned crap advice, the banks' standard stock in trade.

Still, never mind ~ the RDR will sort everything out and we'll all live happily ever after.

From the clients point of view he was seeing an IFA, just clouded by the HSBC name.

Where was the compliance within a bank that allowed £1.2M into one fund? Surely this and no fact find would have resulted inn the compliance department failing the recommendations or is the sale more important?

One question though fees or advice was taken on this case. With a fee for £1,500 with no fact find and one fund would see some what excessive?

Unfortunately we true IFA's will get tarred with this advice again.

The fine is irrespective, its the guilty bit that sticks to the IFA and Coutts view of there "new" employee now would be?

The sale is more important ~ than ANYTHING.

Maybe the FSA will now step in. HSBC and Matthew Marsden both founf guilty of bad advice so there should be some action by the regulator.

Let’s be careful here…………… It is not hard to see a scenario where this adviser made a lazy decision to put these funds into what he perceived to be a low risk investment. Cash equivalent no, but low risk with reference to the perception at the time, yes, A lot of advisers used this fund without explaining the potential for systemic market risk to their clients. If you used this fund, did any of you explain the potential ramifications of AIG going bust to prosective investors?

-The adviser should have completed a fact find.

-The monies should not have gone into a single fund.

-The clients were not financially illiterates but a successful businessman and an ex director at Merrill Lynch.

-The adviser made no material financial gain by recommending this product over others.

I do not know this man and I am not making excuses for the lapses in his advice (and HSBC’s apparently shocking absence of compliance process); however in awarding this level of compensation the judge is acknowledging two things :-

1) That the investors (particularly financially literate ones) cannot absolve themselves of all responsibility when examining the advice that they receive, and let’s face it, this was not complex advice.

2) It was not reasonable for an IFA to predict the events of 2007 – 2009.

If clients only read the headlines of this case then a little more dirt will stick to our profession. We can only hope that clients do what this couple apparently did not and go into the detail.

It will be fascinating to see the ramifications of this case for us and our industry.

Utter utter Rubbish.....

Justin,

I agree with your early post that IFAs attached to the Wealth Management Arms of private banks have pressure from management to meet sales targets. It might also be justifiably to claim that these advisers work within a sales earnings model not a pure advice model. Due to the constraints of working within a corporate environment it could also be argued that they tend to be reactive and not proactive when advising (as opposed to selling to) their clients.

What is not in question is whether the advice was bad. The judge has determined that it was.

In your earlier posts, you refer to commission being a driving factor which it wasn’t in this case (the clients being given a fee option). You also try to draw a parallel between advising on the AIG fund and question whether the adviser is now selling tax mitigation plans at Coutts. I would suggest that there is a world of difference in risk between the AIG fund and tax mitigation planning.

Citywire posts from advisers often express a sense of frustration at the perceived blinkered approach of the FSA. We must not fall into the same trap, otherwise we leave ourselves open to the accusation of double standards.

I would be very interested to hear your views on the nuanced judgement of the court in this case instead of your views on the adviser in question. "Utter utter rubbish....." does not move the discussion forward.

Vive la debate!

"It was not reasonable for an IFA to predict the events of 2007 – 2009". In the eyes of the FSA, not having 20/20 vision is no excuse. If the FSA considers you not to have done something according to standards devised by them several years after you gave your advice and the transaction completed, well, tough. You must now review everything retrospectively according to these new criteria and, if you're found to have failed to meet them (a virtual certainty), in the eyes of the FSA you're liable and you (or your PI insurers) must pay up. Such programmes are euphemistically described by the FSA as "thematic reviews". What kind of environment is that in which to try to make an honest living?

In this particular case, the FSA would doubtless declare that HSBC failed to carry out adequate "due diligence" on AIG and that if it had done, then the client wouldn't have lost money. Never mind Equitable Life, ArchCru and all the other provider failures that the FSA either failed to foresee or on which it failed to act despite being in possesion of information on which it most certainly ought to have acted. When the FSA fails, it's bonuses all round (it's always bonuses all round at Canary Wharf). When an advisory firm fails, it's pay, pay, pay.

As for the standards of bank advice in general, it's hard to imagine much easier targets for a hatchet job. Certainly, that's what I've always found.

I do have a tendency to get on my high horse but why not....

Advice aside, the main issue here is that the the FOS cannot force a firm to pay more compensation than £100,000. I can only assume that knowing this the clients sought the courts for redress. In the courts it is not only about the facts it is about how those facts are portrayed by the lawyers, such as his expertese. If these had been heard by the FOS am sure that HSBC would have been forced to pay £100,000 and asked to pay a further £85,000.

Although with regards to my tirade on commission and your suggestion that this chap has not benefited.... well he didnt do a fact find, HSBC attemtpted to say that it was execution only case so what did he do, he must have put the agency number on the app form so that the £8,500 could be received. This is significantly more than he would have received telling the client to spread it around various deposit accounts and I wonder if there was any trail involved?

Am sure that there is a world away from AIG and some tax mitigation plans offered......but they both have ended up in court.

Don't judge a case and an individual based on selectively summarised facts. As some of the comments previously have rightly picked out, why would intelligent, clealy knowledgeable individuals invest so much in one area if the advice was really requested on a formal client basis. Perhaps the reality is that this is a case of greedy, rich people trying any means possible to recover a poor decision on their part, regardless of who they damage in the process, as long as they can recover some of their money, despite the fact they clearly have plenty! No sympathy from me and I believe the public should refrain from judging cases like this based on media incited prejudices.

Hmmm dont judge and then judge the greedy rich?