The Financial Ombudsman Service has told an adviser to compensate a client who they told to make an unsecured loan to a third party with money from their Sipp.
In the case, a client referred to as Mr H was advised to set up a Sipp by The O’Rourke Partnership in 2011 and was introduced to a third party later in the year.
Mr H says O’Rourke Partnership recommended and arranged for him to make an unsecured loan of £29,325 to the third party from funds he held in his Sipp.
The loan was to be over a short-term at a high rate of interest but the loan has not been repaid and Mr H has lost his money.
An investigator reviewed the complaint, thought the advice was unsuitable and recommended that it should be upheld.
He said that the unsecured loan was too high risk for Mr H, comprised far too great a proportion of his pension funds, and The O’Rourke Partnership should not have recommended the loan.
The investigator said that the firm should pay Mr H £200 for the distress this situation had caused as well as compensation.
The case was subsequently referred to the ombudsman as the adviser did not reply to the investigator’s judgment and an agreement was not reached on the matter.
The ombudsman Keith Taylor took on the case and has reached the same conclusions as the initial investigator.
He explains that an unsecured loan agreement was established between the Sipp trustees on Mr H’s behalf and the loan recipient.
This was witnessed by a representative of the adviser and while there is no letter of recommendation Mr H says the loan transaction was suggested and arranged by The O’Rourke Partnership.
Taylor says: “I am satisfied that but for adviser’s involvement, I don’t think Mr H would have made the unsecured loan. I consider that the loan transaction, with the loan unsecured, represented a higher level of risk than Mr H was willing or could afford to take.
“I think the adviser had a duty to ensure that the loan transaction was suitable for Mr H. But I don’t think that it was. It was too risky for Mr H particularly given that the loan represented such a significant proportion of his Sipp.”
Taylor adds an unsecured personal loan exposes the money to many risks – not only that the interest might not be paid but that the capital itself would be lost if the borrower finds themselves unable to meet the repayments.
Furthermore as it is unsecured, there is no security which can be sold to repay the capital.
As with a single loan, there is no spread of risk across many different arrangements as might be the case with other structures like peer to peer lending.
To compensate Mr H, the ombudsman says The O’Rourke Partnership should pay Mr H £200 for the distress caused in addition to his financial loss.
To calculate the financial loss the adviser should compare the performance of Mr H’s investment with the FTSE UK Private Investors Income Total Return Index benchmark.
If the fair value is greater than the actual value, there is a loss and compensation is payable and if the actual value is greater than the fair value, no compensation is payable.
The O’Rourke Partnership was not available for comment at the time of publication.
