Mis-sold Investments

What are mis-sold investments?

A mis-sold investment is the deliberate or reckless sale of an investment, usually stemming from poor advice, commission opportunities for a financial advisor, or a failure to take into account the customer’s needs when selling an investment product.

Some common areas of concern that indicate you may have received a mis-sold investment include:

• Your financial advisor failing to explain the financial risks involved in an investment
• Your financial advisor failing to explain how your money would be invested
• Your financial advisor making unsuitable investments based on your needs
• Your financial advisor omitting to declare if an investment was high risk
• The presented investment sounding too good to be true

You should also be concerned if your financial advisor has ever encouraged the following:

• Using your pension to invest in a product or fund
• Borrowing money to fund an investment
• Encouraging you to invest a large volume of your savings into a single product

It’s important to note that the sale of mis-sold investments is not limited to smaller firms. Many well-known financial institutions have previously been found to have provided poor advice or ignored customer resulting in them receiving a mis-sold product.

If you believe one or more areas of concern apply to your situation, then you may have been the victim of a mis-sold product and could therefore be eligible to make a financial claim.

Types of mis-sold investments

If you believe you’ve purchased a mis-sold investment, but are unsure what that investment might be, you should discuss it with a claim’s expert. However, the most common types of mis-sold investment include the following:

• Stocks and shares ISAs
• Open Ended Investment Companies (OEICs)
• Bonds – including but not limited to investment bonds and with profit bonds
• Managed portfolios
• Personal Equity Plans (PEPs)

Stocks and shares ISAs

ISAs, Individual Savings Accounts, are specialised saving accounts that allows people to store money and make investments without paying income or capital gains tax on it. They’re generally offered by banks or building societies, but investment firms can also offer their own saving account options.

There are four main types of ISA available, but Cash ISAs and Stocks and Shares ISAs are two of the most prominent products.

However, one major issue associated with applying for an ISA, is customers being led to believe that Cash ISAs and Stocks and Shares ISAs are in fact the same product. But whilst both offer tax advantages, they are very different products which carry different levels of risk.

A cash ISA is simply a tax-free savings account, whereas a Stocks and Shares ISA is a tax-efficient investment account which allows you to put money into a range of different investments, including shares, bonds, and investment funds.

If you were sold a stocks and shares ISA specifically, your advisor should have discussed certain things with you. These include:

• Your current financial situation
• How stocks and shares ISAs differ from cash ISAs
• The associated risks of any investment
• If you have any existing investments

If they did not discuss these things with you, then you may have been mis-sold a stocks and shares ISA.

Open Ended Investment Companies (OEICs)

In the UK, Unit Trusts and OEICs are the two most common types of investment funds. These are often promoted in the media and are popular with small private investors, as they allow investors to pool their money together if they have smaller amounts to invest.

Both types of funds have proved popular in recent years because they offer a practical and affordable way for clients to diversify their investment across different asset classes, while negating the pressure of making routine calls about individual stocks and shares, particularly if they don’t have the expertise. OEICS have also increased in popularity due to their simplified structure, with many Unit Trusts converting into OEICS in recent years.

Both Unit Trusts and OEICS are run by a fund manager, whose role is to buy stocks and bonds for the holders of a fund in an ‘open-ended’ format. With this, they can create new units or shares in order to meet demand or cancel the units or shares of investors exiting the fund.

It’s important to note, however, that investors can only purchase units from Unit Trusts, and shares from OEICS. These two types of funds also differ in terms of how they are priced. Unit Trusts have two prices, a ‘bid’ price and an ‘offer’ price. OEICS on the other hand, have only one price per day, based on the ‘Net Asset Value’ or ‘NAV’ of the underlying assets of the fund.

In addition, both Unit Trusts and OEICS charge fund holders’ management fees while the fund is active. Typically, clients can expect to pay between 2-6% on their initial investment over the course of a funds life cycle, with additional annual fees ranging from 0.75-2%. If a fund is not performing as well as expected, then over time, these accrued fees can have a real impact on the capital invested and result in a potential negative return on investment.

Consequently, your adviser must explain the associated risks or charges with you, and take into account your attitude to risk and capacity for loss, before allowing you to invest.

Bonds

There are two main types of Bonds that people can typically invest in. These are known as investment bonds and with profit bonds.

Investment bonds

Investment bonds are lump sum life insurance policies which you can invest across a variety of different funds. These bonds then mature over an agreed upon term limit, allowing you to withdraw some of it annually as well as the overall lump sum at the bond’s expiration. The amount you receive upon a bond’s maturity, surrender, or your death, depends on how well the investment performs.

Investment bonds can be a profitable investment, but there are a range of risk factors associated with them that your financial advisor must make you aware of.

With profit bonds

With profit bonds, on the other hand, are generally considered to be a low-risk investment, making them a very popular investment option. With a with profit bond, your lump sum investment is spread across a variety of asset classes which reduces risk while providing income or capital growth. You also receive an annual bonus depending on the performance of underlying investments.

As with investment bonds, there are various risks associated with investing in a with profits bond that you must be made aware of by your financial advisor.

Managed Portfolios

One of the major parts of any investment strategy is spreading the level of risk. Usually, you would do this by pooling your resources with others and utilising different investment schemes in order to reach the lowest risk possible. However, if you have sufficient capital, an advisor may recommend you invest in a managed portfolio. This tends to be the case if you have investments totalling more than £50,000.

Despite the lower level of risk, unsuitable or incorrect advice from your manager can still lead to you losing money with managed portfolios. When you purchase a managed portfolio, your advisor should have considered and explained to you all the risk and costs related to regular investments, as well as a thorough explanation of how a managed portfolio works.

Personal Equity Plans (PEPs)

Personal Equity Plans (PEPs) were particularly popular form of investment in the past before they were replaced by ISAs. They allowed people to easily invest in the stock market and receive profits from it without paying any income capital gains tax. After they were replaced, existing customers could no longer add to the investment, but they could still enjoy the same tax advantages.

The two main problems associated with PEPs are that not everyone who invested was in a suitable position to purchase one, and the high-risk nature of the product was never explained clearly by the advisors who sold them. This led to many people losing a lot of money and not understanding how or why they had lost it.

If you purchased a PEP, the advisor who sold the investment to you should have informed you of the associated risks. These include the impact of an underperforming PEP, the advantages and disadvantages of the PEP, your level of investment experience, alternative products, and your general attitude towards risk.

If the advisor failed to discuss any of these things with you, and you have lost money, then you may have had a mis-sold investment.

If your financial advisor failed to discuss one or all of the risks and costs associated with any of the previous types of investments, then you could have received a mis-sold investment and could therefore be eligible to make a compensation claim.

How we can help with mis-sold investments

Here at The Compensation Experts, we know just how costly mis-sold investments can be. To see if you may be able to make a claim for mis-sold investments, contact us today by filling in our contact form, or by calling us on 01618841451 to speak to one of our friendly expert agents.