calculating redress for 'loss of investment opportunity'

In issue 33 of ombudsman news (November 2003), we outlined our approach to the payment of 'interest' in cases where we require firms to compensate customers for financial loss. We also explained some changes that would take effect from 1 January 2004. This article looks in more detail at the calculation of redress for ‘loss of investment opportunity’, in other words where – because they took firm’s (inappropriate) advice – customers lost the opportunity to invest their money in some other way and to earn a return on it.

Even where it is not possible to establish exactly what the customers would otherwise have done with their money, we can make a reasonable assumption that they would have earned a reasonable rate of return. So we require the firm to return the sum originally invested, together with an award to compensate the customer for the amount they would have earned on that original investment. We calculate this as interest using the Bank of England base rate plus 1% per year. (Details of Bank of England rates can be found on their website).

As we noted in issue 33 of ombudsman news, we expect firms to comply promptly with our money awards. If they delay paying redress for more than 28 days, we will require them to pay interest at the rate of 8% simple per year, from the date of our decision on the case to the date when they pay the redress.

The following case studies are based on disputes we have dealt with since 1 January 2004.

case studies – calculating redress for 'loss of investment opportunity'

37/5
firm wrongly advised small business to invest in unit trusts

Mr J ran a small business – TJ Ltd – and for many years he kept all of its funds in a business bank account. However, after seeking financial advice from the firm, he transferred a sizeable amount into one of the firm’s range of unit trusts.

Mr J had stressed to the firm’s representative that he was not in a position to take any risks with the money. So he was very concerned to find – two years later – that the value of his investment was less than the amount he had originally invested. The firm turned down his complaint that it had given him inappropriate advice, so he came to us.

complaint upheld
We concluded that the firm’s advice had been inappropriate and that the firm should pay back the amount of money that Mr J had originally invested in the unit trusts.

There was clear evidence that, until he had acted on the firm’s advice, Mr J had kept all of TJ Ltd’s funds in a business bank account. And he was adamant that he would have left the money there if the firm had not persuaded him to invest in unit trusts. So we told the firm it should pay Mr J a sum equal to the amount of interest he would have earned if he had left the money in his business bank account.

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37/6
firm incorrectly advised customer to invest in a savings bond

Mr L visited a firm of independent financial advisers to discuss how best to save a regular monthly amount. He wanted to build up a lump sum to put towards his children's future university fees.

Acting on the firm's advice, Mr L began making monthly contributions to a savings bond. Just over a year later, he discovered that his investment had fallen dramatically in value. He complained to the firm, saying it had not told him there was any risk that he would lose so much money. When the firm refused to uphold his complaint, Mr L came to us.

complaint upheld
The firm’s representative had recorded that Mr L had a 'cautious' attitude to risk. However, it had sold him a bond that was suitable only for someone who was willing and able to take a high level of risk with their money.

Since Mr L had been wrongly advised by the firm, and had lost out as a result, we said it should give him back his contributions. To establish whether the firm should also compensate him for the loss of the opportunity to invest elsewhere, we looked at what he would have done if the firm had not advised him to invest in the bond.

Mr L stressed that he had wanted to invest the money in some way, rather than simply leaving it in his bank account. However, he was not at all sure how he would have done this. He said he had been totally reliant on the firm’s advice.

We told the firm that as well as refunding Mr L’s contributions, it should add an amount to represent the loss of use of his money, calculated as if it were interest on the total value of his contributions, and that it should calculate the interest using the Bank of England base rate, plus 1% compound per year.

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37/7
customer wrongly advised to invest in a savings bond

Mr Y received £8,000 when his investment in a building society’s guaranteed bond matured. As he had no immediate need for the money, he decided to re-invest it. After taking advice from an independent financial adviser, Mr Y put the money in a savings bond.

Unfortunately, the bond did not perform at all well and Mr Y subsequently complained to the firm. When it rejected his complaint, he came to us.

complaint upheld
We concluded that the bond had been too risky an investment for Mr Y and we told the firm it should return to him the £8,000 he had invested. We noted that although Mr Y had said he wanted to re-invest the money, he was not certain what he would have done had he not taken the firm’s advice.

We said the firm should compensate him for the loss of use of his money, calculated as if it were interest. We said it should do this by paying him an additional amount, calculated using the Bank of England base rate plus 1% compound per year, from the date when Mr Y invested in the bond to the date when we issued a final decision on his case.

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The following example illustrates in greater detail the compound interest rate calculations.

37/8
customer wrongly advised to put money in risky investment - how calculation for loss of use of his money accounted for differing Bank of England base rates during the period of the investment

Acting on the firm’s advice, Mr A invested £20,000 on 6 October 2001. Alarmed at the extent to which his investment was decreasing in value, Mr A cashed it in at the end of August 2003, receiving just £12,500. When the firm refused to accept that it had given him inappropriate advice, Mr A came to us.

complaint upheld
We agreed with Mr A that the investment had been inappropriate for his circumstances as it carried such a high risk. We told the firm to pay Mr A £7,500 – the difference between the amount he had invested and the amount he had received when he cashed in the investment.

It was unclear what Mr A would have done with the £20,000 if he had not taken the firm’s advice. So we said the firm should compensate Mr A for the return he could otherwise have got on his money, calculated as if it were interest, using the Bank of England base rate plus 1% compound per year.

The Bank of England base rates that applied were:

	4.50% from 4 October 2001;
	4.00% from 8 November 2001;
	3.75% from 6 February 2003;
	3.50% from 10 July 2003;
	3.75% from 6 November 2003 to 5 Febuary 2004.

Since the Bank of England base rate changes over time, different rates applied over the period up until he cashed in his investment on 23 August 2003.

The calculation below shows how the compensation for this period was calculated, using the following rates:

	5.50% for 33 days from 6 October 2001 to 8 November 2001;
	5.00% for the next 455 days to 6 February 2003;
	4.75% for the next 154 days to 10 July 2003;
	4.50% for the final 44 days to 23 August 2003.

This was calculated as follows:

We then looked at the compensation due to Mr A for the period after he cashed in his investment until the date of our final decision on the case (2 January 2004). Since he did not have the use of the loss of capital and the additional return from 23 August, we made a further award to compensate him for this, using the Bank of England base rates that applied, plus 1%.

The sum owed for this period was £154. This was calculated using the following interest rates:

	4.50% from 23 August 2003 to 6 November 2003;
	4.75% to 2 January 2004.

So the total the firm had to pay was £9,548, broken down as follows:

£7,500	(representing the lost capital)
plus
£1,894	(the sum awarded for loss of investment opportunity on the £20,000 original investment)
plus
£154	(for the lost opportunity to invest the full amount of redress – from the date when the investment was surrendered until the total compensation became payable at the date of the final decision)

Mr A accepted our final decision on the complaint, but the firm delayed its payment for over a month. So we said it had to pay interest at a rate of 8% simple, to cover the period from Mr A’s acceptance of our decision until it actually paid him.