A judge has ordered Zurich to pay damages of £223,000 over advice given by one of its appointed representatives to help a client reduce their inheritance tax (IHT) liability.
The judgement, which related to advice given by an Allied Dunbar adviser in 2001, overturned a 2014 Financial Ombudsman Service (FOS) decision that found in Zurich’s favour.
IHT advice
The advice was given to Angela Lenderink-Woods, a now 96 year-old British national who has lived in Costa Rica since 1980. In 2001 she had an investment portfolio worth £567,000 which had a potential IHT liability.
She turned to Allied Dunbar adviser Huw Davies for advice on how to reduce the potential IHT bill for her daughters. He advised Lenderink-Woods to open a gift and loan trust in order to reduce the liability.
However, this was erroneous because she was not UK domiciled.
This error formed the core of the complaint. Lenderink-Woods said Davies had unnecessarily sold her offshore investment bonds and had put her in a gift and loan trust that was not suitable because she was not domiciled in the UK.
As a tied adviser, Davies could only recommend a certain range of products. In this case, he recommended several Allied Dunbar bonds.
During the hearing an IFA gave evidence about the suitability of the advice. He said a tied adviser was not able to give competent advice to the topic.
‘If competent advice was to be given an adviser would have needed to be independent and able to recommend products and funds from across the marketplace,’ he said.
This was not challenged in court.
Charging question
An issue began to emerge in 2011, when Lenderink-Woods’ daughters questioned the charges being paid for the advice.
According to the judgement, Lenderink-Woods thought she was paying 2% (and in fact thought this was 2% on returns), but charges for the bonds actually came to 4.5% for the first year and at least 2.3% per annum over a ten-year period.
This included a 0.5% annual fee collected by Davies. This was mentioned to Lenderink-Woods, but the judgement said ‘he made no mention’ of the Allied Dunbar management charge.
This included an offshore investment bond with an annual 1.5% admin charge and a personal portfolio bond which had set-up fee of 2% of the original investment for the first year, and then 1% for the next four years.
The fact these were not made clear to Lenderink-Woods before she signed up to them was a breach of the Allied Dunbar sales process, according to Justice Norris.
The judge ruled that for the amount invested, around £500,000, the wealth management fee should have been 1%. Davies exceeded this.
Refund retraction
When Lenderink-Woods brought her complaint about the charges, Zurich initially offered her compensation of £459,567 in July 2012.
However, the company retracted the offer one month later.
In a later FOS decision Zurich said it retracted the offer because it believed the original response may have been based on incorrect information.
‘We have found no evidence to suggest that these bonds were not suitable products to meet her objectives at that time,’ the company stated.
This was despite a warning from a media relations manager at Zurich telling the company it was on morally ‘dodgy ground’ with the retraction, and a compliance officer stating he felt ‘increasingly uncomfortable’ with that course of action.
The FOS complaint
The FOS rejected the complaint against Zurich in January 2014 on the basis that the advice to use the trust did not in itself cause financial detriment.
‘By placing the investments in the offshore bonds, this had the effect of removing the potential future tax liability. Overall, given [Mrs Lenderink-Woods’] requirements to mitigate her tax liability whilst retaining access to her capital and also receiving an income, the advice seems to have largely met her needs,’ the FOS adjudicator said.
Justice Norris argued this assumed the trust and the bonds ‘were simply pieces of paper that had to be signed to secure a tax advantage’. This was not in fact the case, since Lenderink-Woods did not have access to her capital and could not receive income from it due to the trust arrangement.
The FOS said it was unable to comment on the case.
The client’s compensation
At the time of the hearing in July 2016 it was established the client’s investments had not grown over the 15 years it was invested, due to the charges in place and the underperformance of the discretionary fund manager Davies chose, Seven Investment Management (7IM).
‘The total of the funds withdrawn and remaining is more or less the same as the total originally invested,’ the judge said.
However, the judge said the performance of the investment was ‘not within the scope’ of the case. Instead it was Davies’ advice to transfer the portfolio into a single asset class in the form of the trust, and the fact this involved ‘unnecessary and duplicative costs’.
As a result, he ordered Zurich to pay £223,000, representing the impact on the value of the fund to July 2016.
A Zurich spokesman said the company accepted the ruling.
‘Zurich notes the judgement delivered by the Manchester High Court.
‘The events which formed the subject of the claim took place nearly 16 years ago, and Zurich ceased operating a network of advisers over 10 years ago.’
‘Zurich accepts the ruling and will comply with it,’ he said.
A spokesperson the claimant’s solicitor, Bendles, was not available for comment. 7IM did not respond to a request for comment.
You can read the full judgement in the case here.
