Mrs K contacted the FOS about investment broker Central Markets, which she claims misled her about the risks associated with investing £25,000 ($33,002, €28,483) in shares in an unlisted company called Palmetto Energy.
She said she was cold-called by Central Markets, now trading as Sequant Capital Limited, and agreed to meet a representative.
She initially traded shares and CFDs (contracts for difference), which allow investors to speculate on the rising or falling prices of fast-moving global financial markets.
Mr K was later contacted about private equity investments and agreed to buy 34,000 shares in Palmetto, which has gone into liquidation.
The ombudsman, who had access to the recorded calls, determined that the risks associated with the investment were downplayed by Central Markets.
Risk level
During an initial fact find call, Mrs K initially described herself as a cautious investor but, after discussion with a Central Markets representative, later changed her status to balanced investor.
The ombudsman said the information provided during a follow up suitability assessment “was sufficient for Central Markets to conclude that Mrs K was not a high-risk investor, and that an investment of £25,000 in unlisted shares was not, therefore, suitable for her”.
During the call, a Central Markets manager highlighted that it was a “high-risk investment in the worst-case scenario, of course, you could lose all the money you originally invested, just to make sure you’re clear on that”.
Mrs K replied: “No, I wasn’t. Why would that happen?”
Rather than drawing the conclusion that the investment was unsuitable, the manager proceeded to “undermine the risk warning”, the ombudsman said.
“I think, the suitability assessment call shows Central Markets’ manager was concerned that if Mrs K understood the true risks associated with the transaction, that might jeopardise the sale of the shares.
“So, he downplayed those risks, when he should have emphasised them.”
Additionally, the ombudsman said Central Markets spoke of the flotation of Palmetto as a certainty and did not make it clear that the company might not float. It also failed to mention that Mrs K might not be able to sell her shares.
Central objects
The broker disagreed with the ombudsman’s findings, stating that as Mrs K was already trading CFDs, which are classified as high risk, the investment was suitable.
It added that balanced investors are willing to risk up to 25% of their total liquid investment portfolio in high-risk investments.
The £25,000 represented 10% of Mrs Ks liquid investments, which was well within her chosen risk profile.
The ombudsman was unmoved, however, determining that “it is fair and reasonable to ask Sequant Capital compensate Mrs K for the loss she has suffered as a result of investing in the shares”.
“I acknowledge that risk warnings were given to Mrs K. But the key point, and the one that is being overlooked by Sequant Capital, is the context in which these warnings were given.
“They were undermined.”
Mrs K has been awarded the value of the £25,000 had the money been invested more appropriately, plus interest.
