investment: market value adjustments

In issue 38 of ombudsman news (July 2004) we set out our approach to complaints about the application of market value adjustments (MVAs) to with-profits bonds when customers withdraw some or all of their investment before the bond has reached the end of its term.

MVAs generally take the form of charges, intended to try to ensure that remaining bondholders are not disadvantaged by those who cash in some or all of their with-profits investment before the end of the bond’s term.

We have said that in dealing with complaints about MVAs, we look to see if the documents from the point of sale clearly explained both that MVAs might be applied and the effect that they could have. We also said that we look at the investor’s circumstances and requirements at the time of the advice, to see if that advice was appropriate. And we have noted that the suitability of the advice ‘… will be particularly important if MVAs were being applied at the time of the advice.’

Firms rely on the terms and conditions of their bonds to enable them to apply MVAs if market conditions warrant it. Whether, and when, they do so would usually be a matter for the firm’s commercial judgement. We can and do dismiss complaints about a firm’s legitimate exercise of its commercial judgement, without considering their merits, as our rules permit us to do.

However, additional issues arise where an MVA already applies to the fund when the advice is given. This article outlines our approach to such complaints and provides several recent case studies.

Firms often take the view that it is irrelevant whether or not an MVA is actually in place on some part of the fund at the time the advice is given. They say that unless the MVA applies to the particular tranche being sold at the time of sale, they are under no obligation to make the investor aware of any current application of an MVA. They argue that applying an MVA is prudent management of the fund, designed to protect the underlying assets, and is just part of the mechanism of a with-profits bond.

We will not normally be concerned with the management of a fund, nor with the percentage equity content of the fund – or any other technical issue. Our role is to resolve individual complaints.

In each case we look at the specifics of the complaint and at the circumstances of the individual investor. We consider among other things:

	the investor’s attitude – at the time of the sale – towards investment risk;
	the investment ‘horizon’ that was originally envisaged; and
	whether the investment aim was income or capital growth.

There might well be investors, probably more experienced ones with longer-term investment horizons, who will conclude that a fund with an MVA would be appropriate for them as they will not need access to their money until the end of the policy term, or until any MVA applied to their investment later on has been removed. Such investors appreciate the purpose of MVAs and decide to invest in full knowledge of the fact that – because of market conditions – MVAs are already in place and are applied when investments are cashed in early.

Other investors, however, tell us that if they had understood the reality of MVAs, they would have been deterred from making the investment at all. We accept that, to the average investor, there is a difference between the remote possibility of an MVA at some point in the future and the current presence of one, particularly where the investment horizon is uncertain. Such investors might accept that severe market conditions in the future could affect their investment. However, they may take a very different view if they know that those market conditions are already affecting payouts.

Firms tell us that they are not trying to ‘hide’ the MVA. But investors may well be left with a different impression if firms fail to make them aware of the MVA when giving advice, leaving them instead to discover it at a later date – probably when they need to make a withdrawal. In such circumstances, investors will feel there was something that they consider relevant to their investment that the firm knew about but had not brought to their attention.

We agree. We consider it only fair that any investor be sufficiently well informed about the fund they are advised to invest in, so that they can be confident it is suitable for them. Our view about whether or not that has happened in the particular circumstances of a case will be an important factor in our overall assessment of the dispute.

case studies – investment: market value adjustments

47/4
market value adjustments – firm warns investor that MVA may apply to his investment ‘in exceptional circumstances’

Mr A was 63 years old, with modest earnings and limited savings other than the £35,000 proceeds of a maturing policy. He was looking for a short-term investment for this £35,000 and in March 2002 he put the money in the firm’s bond.

He was very surprised to find that the firm applied an MVA when he withdrew some of his money the following year. He complained to the firm, saying it had not told him about the possibility of an MVA. When the firm rejected his complaint, he came to us.

case upheld
The firm told us that it had given Mr A documents explaining that an MVA could apply ‘in exceptional circumstances’. However, we concluded that this was misleading as an MVA had only recently been applied to investments made between December 1998 and March 2001.

We accepted Mr A’s statement that he had wanted a short-term investment in which his funds were accessible. In view of his particular circumstances, we thought it unlikely that Mr A would have proceeded with the investment had he been fully informed. We therefore upheld his complaint.

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47/5
market value adjustments – investors told of possibility of MVA but not that it was already in force

Mr and Mrs J were cautious investors who invested £5,000 in a with-profits bond in June 2001. Although they were given documents explaining that an MVA might be applied ‘from time to time’, they had not been made aware that one had been applied in September 2000 to the series of the fund in which they were investing.

The firm argued that there was no duty on the adviser to differentiate between the possibility that an MVA might apply and the fact that one was already applying. It said that the application of the MVA did not affect the inherent risk of the product, although it accepted that it might have been a factor in the level of returns.

Mr and Mrs J said that they were not given any information about the MVA that was in force at the time and we found no evidence to the contrary. We were not satisfied that, as cautious investors, they would have accepted advice to enter into a with-profits investment where an MVA was currently being applied.

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47/6
market value adjustments – firm warned investor of possibility of an MVA when she first invested – but did not inform her, when she made subsequent investments in the same fund, that an MVA was by then in force

In 1998, Mrs M sought investment advice as she wanted to obtain an income with some capital growth. She did not want to take risks with her money but was happy to invest for a minimum term of five years. On the firm’s advice, she invested in a with-profits bond.

After further advice in November 2001, she made two additional investments in the same fund, by which time an MVA was applying to withdrawals from the fund for existing bondholders.

When the firm rejected Mrs M’s complaint about the MVA, she referred the matter to us.

complaint upheld in part
Although the documents from the point of sale in 2001 referred to the possibility of an MVA, the firm had not made Mrs M aware that an MVA was currently in force.

The firm felt that Mrs M had been given sufficient warning about the MVA before she committed herself. We accepted that this was the case in relation to the 1998 investment, which did appear to be suitable for her.

However, we took the view that she was not given all the relevant facts to enable her to make a fully informed decision in November 2001, because the firm had not made her aware that an MVA was already applying to the fund. We upheld the complaint in part.

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