The Financial Services Authority (FSA) is planning to fine Lanarkshire-based Westwood Independent Financial Planners £100,000 for unsuitable sales of geared traded endowment policies (Gteps).
The regulator has outlined its plans in a decision notice on the firm. Westwood appealed the FSA fine to the Upper Tribunal in June but the hearing was delayed. If the firm does not successfully appeal against the decision, the FSA will impose the fine in a final notice.
The FSA said Westwood had invested 10 clients, including a retired 73-year-old widow in financial difficulties, to re-mortgage their homes in order to invest in Gteps which promised returns of 10% per annum.
The regulator said it had found ‘very serious’ failings in the suitability of advice given by Westwood to its clients adding that the firm had not communicated its advice in way that was fair, clear and not misleading.
The regulator stated in its decision notice it had found no evidence Westwood had carried out research on suitable alternative investments to the Gtep plans in the 13 case files.
‘In all the files reviewed by the FSA the risk warnings were the same. This had the effect that customers were not expressly warned of the individual risks inherent in the Gtep plan in relation to their specific personal and financial circumstances; such as the increased risk if the source of investment funds was derived from re-mortgaging the customer’s home,’ stated the FSA.
It highlighted the case of Customer H, a retired 73-year-old widow advised to invest in a Gtep despite describing her attitude to risk as ‘medium’ and suffering financial difficulties.
‘There was no evidence on the customer file to indicate that the adviser had considered the higher level of risk as a result of the re-mortgage or the potential impact on her (particularly as she was relying on the Gtep plan to provide her with a regular monthly income) if she was required to inject additional cash or the income from the plan was suspended, or stopped,’ the FSA said.
‘Customer H was unable to make additional cash contributions to the Gtep plan and her income from the plan was stopped in January 2009, whilst she remained liable to meet the cost of funding the mortgage debt incurred to provide the funds to invest.’
Westwood failed to explain the risk associated with re-mortgaging their homes to meet the minimum investment level for the Gtep plan or gearing their investment, according to the FSA. Customers were also not warned in the suitability report that they faced margin calls or the withdrawal of their loan by the lender if the value of the traded endowment portfolio fell.
The regulator added that the three Westwood advisers who sold Gteps had an inconsistent approach towards suitability and the necessity for clients to hold additional capital to meet margin calls from the lender.
The FSA also found Westwood gave incorrect information about the nature of the loans and the charges associated with the Gtep plans to customers.
Westwood claimed the FSA’s investigation was biased, incomplete and professionally incompetent adding that Gteps had a medium risk profile which matched those of its clients. The Scottish firm added no client had lost their home as a resulting of investing and their demand for higher rates of income meant that there were no alternatives available to the Gtep plans.
The FSA contacted Westwood as part of its thematic review of Gteps, which has resulted in censures for Integrity Financial Solutions and Garrison Finance Centre while Knowlden Titlow Financial Services, Derrick Hales Financial Planning and Matrix Model Group were fined. Westwood reported that it had no significant issues with its sales but the FSA investigation uncovered serious failings.
Westwood argued that the FSA should not consider the £509,000 commission made from the sale of 50 Gtep policies between September 2005 and October 2007 in calculating a fine. The firm will earn a further £700,000 in trail commission over the 15-year period of the policies, according to the FSA.
The FSA rejected this point but said it failings were mitigated by Westwood’s work with customers suffering financial difficulties as a result of investing in Gteps. The regulator also took into account Westwood’s ability to pay redress to its customers when calculating its fine.
Westwood is controlled by Colette Chiesa and John Chiesa, who was also directors of Westwood Trustees, an appointed representative of failed network Alpha to Omega. The FSA removed Alpha to Omega’s permissions in January 2010 over the sale of unregulated collective investment schemes by its advisers, leading to a £42,000 fine for two of its directors.