We’ve been asked by members of the public who invested without financial advice if there is a way to get a full refund if their stocks or funds fall in value.

Seasoned investors may think that is a silly question; for the less experienced it is fair question to ask.

Some people who made investment decisions themselves think there should be compensation because they didn’t understand the risks associated with putting money into the stock market.

In defence of the finance industry, the risk warnings are very clear when you go to make an investment via a stockbroker or fund platform.

Just so everyone understands; you cannot get compensation if there is a fall in the value of an investment you made on your own and without financial advice. You are buying a slice of a company either directly or indirectly when investing, so you share that company’s pain as well as the gain.

You cannot get compensation if your investee company says it is going to do something but fails to deliver on its promise.

However, you can get compensation if you were mis-sold an investment by your bank or another financial company.

‘Mis-selling means that you were given unsuitable advice, the risks were not explained to you or you were not given the information you needed, and ended up with a product that isn’t right for you,’ says The Money Advice Service.

You can also seek compensation if the financial company holding your investments goes bust as long as it was authorised by a UK regulator.

HOW THE COMPENSATION SYSTEM WORKS

The Financial Services Compensation Scheme (FSCS) is the UK’s statutory compensation scheme for customers of authorised financial services firms. It offers protection for up to £85,000 per person for cash deposits per financial institution.

Temporary high balances of up to £1 million held for six months or less and resulting from life events like a property transaction, redundancy payment, retirement benefits or inheritance are also covered.

Investment protection is limited to £50,000 per person, per financial institution. The main exception to this limit is pension assets managed in an insured pension which are fully protected.

‘MIS-SELLING MEANS THAT YOU WERE GIVEN UNSUITABLE ADVICE, THE RISKS WERE NOT EXPLAINED TO YOU OR YOU WERE NOT GIVEN THE INFORMATION YOU NEEDED, AND ENDED UP WITH A PRODUCT THAT ISN’T RIGHT FOR YOU.’

Trust-based pensions are in theory only covered up to £50,000 if the pension company goes bust. In reality, the assets in the pension are ring-fenced as they’re held on trust for you, not by the pension manager. So you’ll still get your pension if the company managing the pension goes out of business.

This will be the position if you have a self-invested personal pension (SIPP) which is held as a trust, even if the SIPP trust sits on an investment platform. You may suffer some delay in terms of being able to buy and sell any investments if the pension provider goes bust, but you should eventually get the money.

Commenting on the FSCS, Alison Treharne, a chartered financial planner and principal of Shore Financial Planning in Plymouth, says: ‘It covers if you were given bad advice, misrepresented or suffered poor investment management if the authorised firm is unable to pay the claim against it or has gone out of business and cannot return the money.

‘Remember, it’s not protecting you if the investment was a bad investment and its value goes down: that is investment risk and you take that on personally.’

WHAT HAPPENS IF I USED A FINANCIAL ADVISER?

If an investment goes wrong and you had sought financial advice, you may have recourse to the Financial Ombudsman Service (FOS).

If you feel the adviser made mistakes, either in the advice given or due to an administrative error, you must outline these clearly to the firm first and give them a chance to resolve the matter or answer your complaint. If you are not satisfied with the response you can write to FOS asking it to review the case.

HOW ARE DIY INVESTORS PROTECTED?

Investments you make via a stockbroker or fund platform are generally held in a nominee account.

‘The investments are held in a nominee account and the creditors of the platform (if it goes bust) will be unable to touch these to settle any debts of the platform business,’ says Treharne.

Assets held in unit trusts and open-ended investment companies are also ring-fenced away from the financial company. As these are held with an independent custodian, the money is safe even if the fund provider goes under.

The situation is more complex for investors who hold shares directly (outside a pooled investment fund), including investment trust shares (which are structured in the same way as public limited companies), and individual corporate bonds.

If a company is declared insolvent, a liquidator or receiver is appointed to realise the failed company’s assets. The liquidation expenses are met first from the proceeds. Then there is a typical hierarchy that determines the order in which investors get paid: corporate bondholders, preference shareholders and then ordinary shareholders.

As bondholders own tranches of corporate debt, they are creditors of the failed company, whereas shareholders own equity and are not automatically owed anything; they may find it difficult to get any money back at all.

WATCH OUT FOR INVESTMENT SCAMS

‘As with any investment it’s important to be on your guard against scams and to be wary of offers that come out of the blue,’ says Kat Barry, expert advice lead at Citizens Advice.

‘If you consult an independent financial adviser make sure they’re certified and that the company you want to invest in is legitimate. You can check both of these by referring to the Financial Conduct Authority’s (FCA) website.’

If you’re worried an investment offer might be a scam contact the Citizens Advice consumer service on 03454 04 05 06 or visit the FCA’s ScamSmart website for help. If you think you’ve been a victim of fraud contact Action Fraud on 0300 123 2040. (JH)

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