A warning to advisers

The following is a case study from the Banking Ombudsman regarding a complaint made against the way a bank has sold managed funds to a customer. The Banking Ombudsman provides some commentary on the case, and the way the bank operated, in the sidebar (right).

Mrs Y had her retirement savings in a savings account and a short-term deposit. In August 2000, she agreed to see an investment adviser at her bank and a number of investment options were discussed. After the meeting, the investment adviser wrote to her, recommending an investment in a managed funds product offered by the bank. He later contacted her again and there was a second meeting at which Mrs Y agreed to put her savings into that product. She invested a total of $280,000, $100,000 of which was taken from a term deposit at 7% per annum, which had to be broken.

Some four months later, Mrs Y found that the value of her investment had dropped by nearly $9,000. She was extremely upset and shocked and after some discussion with the bank, transferred the balance of her investment out of the managed funds product.

Mrs Y complained to her bank but failed to receive what she regarded as a satisfactory response. She then complained to me about the process by which she had been persuaded to put her savings into the managed funds product. She considered she had been rushed into transferring her funds into a product she did not want or need and that she had been the victim of a high powered and overwhelming sales pitch. She did not really understand all the features and the nature of the investment product and also said she had not received a proper explanation of the reason for the decline in the value of her funds.

The bank agreed that its staff had approached Mrs Y about investment services and that it was its policy to make such an approach to customers who had substantial funds on term deposit. Very often another type of investment was more suitable for such a customer and it felt it was providing excellent customer service by taking the initiative in this way. However, it became clear during the course of my investigation that Mrs Y was simply not a suitable customer for that type of customer service. She did not appreciate constantly being asked if she was interested in other bank products. She viewed what the bank saw as excellent customer service as pressure and harassment to which she eventually gave in.

I was satisfied that the bank staff had explained the product to Mrs Y and that the investment recommended to her was reasonably appropriate after a full and careful consideration of her circumstances. Nonetheless I was not so certain that she fully understood the nature of her investment. In particular, she did not realise that it was possible for the value of her original capital to decrease substantially right from the start of the investment or that she could incur a substantial loss in a matter of months.

I also concluded that she received a reasonable explanation for the rapid decline in the value of her investment. It was due mainly to falls in the value of world and New Zealand shares because of the slowing down of the US economy, which in turn affected the sharemarkets of other countries. However, I was concerned that the bank did not provide Mrs Y with good advice when it persuaded her to invest nearly all of her savings in managed funds and in particular when it advised her to break the term deposit that was already producing a good rate of return.

I proposed to recommend that the bank reimburse Mrs Y for the loss suffered in moving her investment out of the term deposit and for the loss of interest that she would have earned had her funds remained invested on term deposit.

Both the bank and Mrs Y accepted my proposed recommendation and the complaint was settled accordingly.