THE FINANCIAL Services Ombudsman should have decided whether a company of investment advisers is entitled to see certain documents from a credit union before ruling on a complaint over the loss of the credit union’s entire €1 million investment in a bond, the High Court has found.
Mr Justice Daniel O’Keeffe said the ombudsman’s failure to consider discovery issues raised by investment advisers McLoughlin Staunton Ltd of Loughrea, Co Galway, was a “serious and significant” error that vitiated the ombudsman’s decision upholding a complaint by Naomh Brendáin Credit Union Ltd, Loughrea, against the company.
The ombudsman should consider whether to order discovery of the documents sought, which include material related to the investment strategy of the credit union, the judge said.
If the ombudsman decided against ordering discovery, his findings that the company acted in breach of its duty of care in its advice on investment in the Friends First ISTC Creative Step Up Bond life policy stand, as will his ruling that the company must pay the credit union €500,000 of its losses, the judge said.
The ombudsman’s finding that the credit union was 50 per cent culpable for the “disaster” of losing its entire investment will also stand in those circumstances, he added.
However, if the ombudsman decides discovery should be ordered, he may then determine the impact, if any, of those documents on his decision apportioning 50 per cent liability to the credit union, the judge said. He has adjourned making final orders in the case until lawyers consider his judgment. Mr Justice O’Keeffe was giving judgment on proceedings in which the company and the credit union appealed the Ombudsman’s findings on the credit union’s complaint arising from its decision in 2007 to invest in the Friends First bond.
The credit union had alleged McLoughlin Staunton was negligent and acted in breach of contract/breach of duty in recommending the bond. It alleged the bond was a highly speculative start-up fund inherently unsuitable for a credit union and the company’s advice had concentrated exclusively on its positive features.
The company denied those claims and argued it had discussed the risk factors of the bond in detail.
The judge also ruled criticisms by the ombudsman of the credit union manager and investment committee were within the range of criticism and comment that could be made by the ombudsman with regard to his special experience and expertise.
The ombudsman had said it was clear the committee did not have expertise in financial management of a level expected when investing large amounts of money and said it was “of grave concern” they signed the bond application form and invested €1 million without having read the detailed application form – which had a “very important” caveat stating there was “a risk that the price of the fund falls to zero” – and brochure, he said.
He found the company believed in good faith the bond was a low-risk investment but also ruled the company was obliged, but had failed, to highlight explicitly to the credit union the risk of total loss on this bond.
The advice of the company fell “far short” of what he would have expected and it failed in its duty of care as a financial adviser.
