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(published in Bloomberg Money, UK, November 2002)
by Brian Bloch
British people who have lost vast amounts of money in the stock market over the last two years, may be able to do a lot more than just lick their wounds. Where losses were incurred through an investment company, particularly one regulated by the Financial Services Authority, they may be able to claim quite substantial compensation.
If clients were sold investment products, shares or funds that were inappropriate or too risky for their needs or preferences, or there was any other mismanagement, the company is potentially liable for damages. The client must be reinstated to the position he or she would have been in if things had been done right.
Everyone knows that the value of shares can go down as well as up. Thus, the buyer for "execution only", takes the risk and full responsibility. The same generally applies to units in a mutual fund.
BUT, if investments were made through a company which promised low risk or rapid reaction to market changes, they are liable through failing to deliver. For example, if a client requested medium risk investments, but most of the money was invested in shares, what he got was high risk.
Especially if contracts or brochures boasted tailored, balanced portfolios and risk control, the gateway is open to all manner of allegations. Legally speaking, this could be misrepresentation, breach or contract, professional negligence and more!
The main issue here is asset allocation - how investments are divided into the different asset classes of equities, bonds and cash. There are other categories too, such as hedge funds (market neutral investments) and relatively stable property funds which have surged ahead through 2000 to the present.
Recent studies show that asset allocation accounts for as much as 90% of the returns from a portfolio. This is more important than any other single factor or decision. If your fund manager overinvested in shares, disaster ensued over the last two years. And sadly, buying too many shares is one of the most common investment mistakes. But sadder still for the company, they may have breached their duty of care and be liable for damages.
Similarly, if clients were advised to put their money into equity funds rather than a bond fund, merely because they don't need income from the investments now, this could also be negligent. People buy bonds because they are not as risky as shares - income is only one factor in the decision.
Furthermore, irresponsible or incompetent fund managers tend to talk about bonds as if they were as homogeneous as a ten pound note and not for people who want decent growth. Yet, there are countless types of bonds ranging from the riskiest "junk" to as safe as the Bank of England. A good mix of bonds, well managed, can and often does outperform a badly managed bunch of shares. So if your fund manager pushed you into a high risk portfolio, because "bonds aren't suitable for a growth portfolio", he or she could owe you a lot of compensation.
Then there is the thorny issue of fund management. The very term "management" means the money has to be looked after actively. If your money was left to drift down at roughly the rate of the FTSE, it was not being managed. What you had was a "closet tracker". This means the company just bought you a collection of shares and left them to the tender mercies of the market.
There are stop loss orders, hedging strategies and other ways to minimise losses. Especially if your manager had discretion, he should have sold out at least some of your holdings when they dropped a certain amount below cost or peak value. Particularly if you invested your money specifically because of promises of rapid reaction to changing market circumstances, you probably have a case for compensation on the grounds of misrepresentation.
In short, if you lost money because the company or person promised one thing and delivered another, or advised you badly and inappropriately, you have a case.
So what can you do? If the company is regulated by the Financial Services Authority, they will have a Compliance Department which "handles" complaints. Unfortunately, financial and investment companies are notorious for their attempts to fob off legitimate complaints with a sophisticated cocktail of obfuscation, distortion, half-truths, false logic, contradictions, delaying tactics and so on. Indeed, this is frequently the REAL task of their Compliance Departments. There are, however a number of techniques for circumventing them.
If, no matter how powerful your case, the firm stubbornly denies everything and believe me, this happens, you can claim compensation, free of charge, through the Financial Ombudsman Service (FOS), for up to £100 000. If an award is made in your favour, the firm is obliged to pay. However, the FOS too, does not dole out money with overwhelming generosity.
The case needs to be formulated clearly, comprehensively, correctly and, where possible, with evidence. For instance, send copies of the relevant documents, showing the promises that were broken, together with a specific explanation and justification.
An alternative to the FOS is to get the company to agree to external mediation. However, you may need to present the firm with a credible threat of litigation to goad them into proceeding. For amounts exceeding £100 000, mediation would be the only option to litigation. The Ombudsman service is slow, so mediation could move things could faster and far cheaper than going to court.
The last resort of litigation really is a tough one - expensive, stressful, slow and complicated. And one must not overestimate the capabilities and affordability of lawyers and accountants. Their presenting a powerful, relevant and detailed case, cannot be taken for granted. Furthermore, even if they are able to do so, at upwards of £150 per hour, you could be in for thousands of pounds in legal fees before the show even gets on the road. And if your case is intrinsically too weak or they botch the job, this money is gone forever.
Thus, for amounts within the Financial Ombudsman Service's limit, it makes sense to try them first. And you can still go to court subsequently. For relatively large sums however, you may, despite the claims of the FOS itself, need professional assistance to present them with a watertight case.
Spend some time and money checking out what went wrong and why. Find the right professionals to assess the merits of the case, the amount of damages (the quantum), and get them to write a preliminary report. Lawyers, accounts or paralegals such as specialists in claim representation, are all potential candidates. Once you find the right sources of information and assistance, justice and compensation should be within grasp, although generally not without effort and perseverance.
Whatever path you choose, the meaning of the old adage "prevention is better than a cure" becomes painfully clear. Nonetheless, where an investment company has gambled away substantial amounts of your money in the stock market and clearly contravened the laws of contract and various others, don't give up.