High-risk MIS advice attracts FOS penalties
The Financial Ombudsman Service (FOS) upheld four complaints against advisers in March for inappropriately directing clients to establish self-managed super funds (SMSFs) and then invest in high-risk real estate managed investment schemes (MISs) that later defaulted.
In all four cases, which relate to advice provided between 2004 and 2006, the FOS found that the advisers did not fully explain the risks associated with the MISs, and that had the clients fully understood the risks involved, they would not have invested their super into the schemes. The advisers were found to have not fully explored their clients’ attitudes to risk or how they would react if they lost their capital.
In each case the advisers claimed that they had done due diligence on the MISs and believed them to be sound and appropriate for the risk profiles of their clients, and that the risks were outlined in Product Disclosure Statements supplied to clients.
In all four cases the complainants said that the risks associated with the MISs were not clearly explained, and in two of the cases the complainants also said they should never have been advised to establish a SMSF.
In the latter two cases the complainants said that the establishment of a SMSF was inappropriate for their situation, and that they would not have rolled their super into a SMSF if they had fully understood what was
involved.
In all cases the clients lost most or all of the capital invested in one or more of the MISs, in amounts ranging from $21,000 to $50,000, according to the FOS findings. The total amounts of the SMSFs established ranged from $433,000 to $700,000, with the high-risk MISs representing about 10 per cent to 20 per cent of the fund’s total value in each case.
The FOS directed the members to repay clients for capital lost (capital invested minus any payments received), plus interest compounded annually from the time of investment to the time of the decision at either 4 per cent or 5 per cent, depending on the case.
The MISs concerned were Kebbel Development Capital’s Gilead retirement resort in Campbelltown in south western Sydney; Kebbel’s Riverside Pier Trust hotel development on the Swan River in Perth; the PCG Capital Nelson Bay Development Trust residential development in NSW; and the Domaine Property Fund Tomago Project, an industrial subdivision near Newcastle in NSW.
Clients invested in the PCG Nelson Bay Development Trust received no income from the project before it was placed into administration.
Clients who were invested in the Gilead and Riverside investments received some income before funds were frozen.
The client who invested in the Tomago project received a partial redemption of $17,500 from their $50,000 investment before funds were frozen, according to the FOS.
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