Fairstone Wealth Management Limited · DRN-6256963

The complaint Mr P complains about the advice he was given by Fairstone Wealth Management Limited to invest £60,000 in enterprise investment scheme (“EIS”) portfolios. What happened In 2020 Mr P became a client of Fairstone, and invested £295,000 in an ISA and bond, which had come from the proceeds of the sale of a property he’d been renting out. Later that year in September, Mr P asked for further advice about mitigating the approximately £28,000 capital gains tax (“CGT”) he would owe on the gain realised from the property sale. He was advised to invest £60,000 split equally across two EIS portfolios. In June 2024 the EIS portfolios were worth around £46,000 and Mr P wrote to Fairstone to express his disappointment in the performance of them and asked to exit them as soon as possible. His adviser explained that they were illiquid and withdrawal may not be possible for months, if not years. Mr P complained, as he remembered being told that it would mature after four years and he was surprised to learn that it could be a lot longer than this. He felt that the tax reliefs available were not beneficial enough to outweigh the risk, now he was aware of the indefinite term of the investment, which increased the risk beyond the amount he’d been willing to take. Fairstone didn’t uphold the complaint and so Mr P brought it to our service. An investigator at our service explained to Fairstone that he felt the adviser had misled Mr P about the potential term of the EIS. Fairstone offered to pay Mr P £13,604.63 which was the difference between the £60,000 invested and the value of the EIS at the date Mr P complained. The investigator put this offer to Mr P and said he thought it was reasonable, because he felt that if the adviser had given a full explanation in 2020, Mr P would have gone ahead with the investment anyway. Mr P disagreed, in summary because: • The investigator had relied on the fact find from 2020, but details in that document were incorrect – the adviser had recorded his income as £100,000, but Mr P was an artist who had been living off rental income and savings. He provided his tax return for 2019/20 which showed rental income of around £8,500 and his tax return for 2020/21 which showed no earned income. • Much of his wealth was tied up in his home, which he couldn’t sell and so he felt it shouldn’t be considered as a liquid part of his wealth when looking at the suitability of this advice. While Mr P had no dependants in 2020, he had told the adviser he was planning a family with his partner, and he had a child soon after in November 2021. • He had cash to cover his living expenses for a four-year period but not much further, which is why he was relying on the EIS being liquid at the end of the four years. He strongly disagreed with the investigator’s conclusion that he’d have invested regardless of the information about the possible term of the investment. • The offer didn’t go far enough as the EIS was still illiquid, and the value had continued to decrease since the time of his complaint.

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The investigator wasn’t persuaded to change his mind, so the complaint was passed to me for a decision. I found the complaint should be upheld in full, and so I issued a provisional decision setting out my findings as follows: My provisional decision “As they were giving advice, Fairstone had certain obligations towards Mr P, including making a suitable recommendation based on Mr P’s circumstances, objectives, investment experience and attitude to risk. The information supplied by Fairstone about their recommendation needed to be clear, fair and not misleading in order for Mr P to make an informed decision about whether to go ahead with the recommendation. I can see that in relation to the ISA and bond, Mr P had an attitude to risk of ‘5 – Balanced’ which I believe was the middle out of a possible 10 levels of risk. I can see that Fairstone set out that the EIS was suitable because of the tax relief available and that Mr P was willing to increase the risk he was taking to achieve that, to a risk level of ‘9 – Very Adventurous’. It’s not unheard of that an investor would agree to increase the risk that they are prepared to take in order to benefit from something they wouldn’t otherwise receive, for instance tax reliefs. However, I’d expect that any decision to increase the level of risk in this way should be made on the basis of clear, fair and not misleading information. This is especially when the increase in attitude to risk results in an investment into a product that is widely considered to involve significant risk of loss – as is the case with EIS investments. So, a particular focus of my decision is whether Mr P was in a position to make a fully informed decision here, by carefully looking at the way the investment and the risks involved were described. I can see the suitability letter and key features documents for the portfolios do say that EIS generally are high risk. However, I’m persuaded that was undermined by other statements made by the adviser which largely downplayed the risk. Mr P met the adviser on 23 September 2020, following which the adviser emailed him the key features documents for the portfolios. On 21 October 2020, Mr P asked the adviser several questions about the risks and timeframe involved, including the following questions: 1. “l want to get a better statistical picture of the risks of an EIS - based on the last decade (and l know new normal will make this hard to interpret), what is probability that l will exit the EIS with a net loss? 2. Regarding the 4 year time frame - l understand it is a minimum but is there any risk my money will be tied up for longer? ln other words, If l wanted to encash it or transfer funds to some other product, could l do so with all my funds at 4 years with no impediment or loss of my tax advantage? 3. How do we decide when the best time to exit the EIS is?” In reply on 22 October 2020, the adviser said (bold is my emphasis): 1. “Regarding losses, there is always the ability to lose with any investment. As EIS are higher risk they have incentives as discussed with include the tax relief and loss relief if the EIS fund went bust. The total reliefs allow up to 61.5% to offset the loss. l can say that in my career l haven’t seen a net loss on the returns, this is driven by 2 factors, one, we are not going for the higher risk EIS funds as we wanted less returns in exchange for less chance of losses. Secondly we diversify between 12-15 companies which allows some companies to fail but still walk away with a return.

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2. Yes, there is a 4 year timescale which is normally a little flexible. Sometimes they will say hold off a month as there will be a increase etc. We are not buying into a film or product that needs to sell for you to get your funds back out, we are investing in good solid companies and we sell the shares at the right time. l can’t see it being held for much more than a month after the 4 year timescale. 3. Answered a little above, we will together make this decision.” In my view, this exchange shows that while Mr P understood there to be a higher level of risk involved in EIS than in the investments he’d previously made, he was reliant on the adviser’s help to understand what that meant in practice. I’m satisfied that the adviser’s reply had the effect of reassuring Mr P that the risks were not as great as they were, particularly the parts I’ve highlighted in bold. In my view, in the suitability letter dated 3 November 2020, the adviser reinforced that message. He set out a possible range of returns from a risk level 9 investment, based on an investment of £100,000 and a ten-year timeframe. He said it could be as low as £54,000 and as high as £410,000 – though did note these weren’t minimum and maximum amounts. He went on to say: “There is a 1 in 20 chance that the value of your investment may fall by 26.50% (equivalent to c. £15,900 based on the total value of your investment) in any one year. There is also a possibility that a fall in value greater than 26.50% could occur, but the chances of this happening are less than 1 in 20… It should be noted that any fall in value is likely to be temporary, with the most probable outcome being displayed above.” Because the letter was about the adviser’s recommendation to invest in an EIS, I believe Mr P would have reasonably interpreted that information as being based on past performance of EIS investments. However, based on entirety of the information under “Investment Risk”, “Capacity for Loss” and “Asset Allocation of your Investment” I believe this performance information was based on a more traditional portfolio of investments, albeit in higher-risk geographical areas. So, it wasn’t based on the past-performance and risks of EIS, and I find that to be a misleading picture of the types of fluctuations that might actually be involved. I accept that investing in portfolios as Mr P did, he was spreading the risk, so it was a lower risk investment than if it was a single company. However, the comments made by the adviser were a much more positive picture than I’d normally expect when discussing a high- risk investment such as this. While that may have been the adviser’s experience, without context I find it misleading – for instance there’s no information about how much experience the adviser had in the area, whether his experience was in certain types of EIS, or specific management companies. It could be that his clients have been particularly fortunate in their choices of EIS. However, in my view it wasn’t reflective of the wider market and therefore I don’t consider it to be a balanced presentation of the risks involved. Mr P was not asking about the adviser’s singular experience but about EIS more generally, and the adviser’s reply didn’t contain enough information for an investor, who was inexperienced in that field, to reasonably know that wasn’t necessarily representative of the market as a whole. While many investors in EIS don’t make a total loss, in particular due to income tax relief, the adviser painted a more positive picture than that. I’d also note that Mr P wasn’t eligible for two of the main tax reliefs (which I’ll go into below) so the loss made by other investors who got those reliefs, wasn’t representative of the types of losses Mr P might experience. I’ve also considered the amount the adviser recommended that Mr P invest, and the wider suitability of EIS generally for his needs and objectives. In my view, the suitability letter wasn’t particularly individualised to Mr P’s circumstances and objectives. For instance, it gave the impression that Mr P would be benefitting from all tax reliefs associated with EIS,

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but no information about the amount of tax relief Mr P would specifically achieve or why he’d be eligible. Having reviewed it, I’m not convinced he’d have benefitted from any relief except the CGT deferral relief and have set out my reasons for each in turn: • Income tax relief – when investing in an EIS investors can claim 30% of the amount invested against their income for the year. The adviser recorded that Mr P had income of £100,000 in the fact find, but Mr P has provided his tax return for the tax year of 2019/20 which shows the income of less than £10,000 from renting the property out (before it was sold) and his 2020/21 return which shows income of £0. In the absence of further evidence, I’m persuaded that the adviser made an error in the fact find about Mr P’s income. Based on the evidence I have, I’m satisfied that Mr P couldn’t have benefitted from income tax relief in the year he invested. • CGT disposal relief – this is available where income tax relief has been received and allows for investors to not pay CGT on any gain from the EIS. Mr P wouldn’t have been eligible for this as he was not in receipt of income tax relief. • Inheritance tax – EIS qualify for business relief which means that if the investment were still held at the time of the investor’s death, then it would be excluded from inheritance tax calculations. Mr P was 45 at the time of the advice and planning on holding the investment for four years, so this was not going to be something he’d likely benefit from. In my view it played no part in the decision to invest. • CGT deferral – this is the only reason Mr P invested, but I can’t see that the adviser set out the potential benefits that could come from investing £60,000, so I’ve considered what that would have been. Mr P had a gain of £97,358 and assuming his CGT allowance was available, which at the time was £12,000, he owed 28% tax on £85,358, which comes to £23,900. I can see he declared tax of £20,150 (possibly due to losses experienced in that or previous years). Its only if the full gain is invested that an investor can achieve full deferral – so as Mr P invested less than the full gain, he would have still had a proportional amount of tax to pay at the time. Approximately 61% of the gain was invested, so by investing Mr P was deferring 61% of the CGT payable on £20,150, which was £12,291.50 – around one year’s CGT allowance. So, the benefit of the investment was that at the point the EIS paid out and the original CGT was revived, if it was worth around the same or less than when he invested, Mr P would have been able to use his CGT allowance for that year. So he would pay no tax on the £60,000 portion of the gain from the property sale, provided CGT allowances stayed the same. This plan was reliant on the CGT allowance being maintained throughout. That unfortunately hasn’t happened, so if the shares are sold now, Mr P won’t benefit from that as the CGT allowance is currently £3,000. I can’t see that Fairstone warned him of the impact of tax changes even in a generic way within the suitability letter. There was no alternate plan put forward of what would happen if the CGT allowance did reduce, or what would happen if the EIS made money and Mr P would have a further gain to deal with. The adviser’s email of 22 October 2020 gave the impression that after four years, Mr P would have a choice as to when to sell the EIS, but from what I’ve seen this wasn’t in his control based on the structure – the returns would be realised based on when the portfolio manager could sell, not when the investor requested it. So, Mr P wouldn’t have been able to choose when to realise any gain or loss in order to manage it in line with his CGT allowance.

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I’m not convinced that the adviser did enough to explain those risks to Mr P as there’s nothing in the suitability letter setting out different scenarios that might occur. There’s no evidence that Fairstone ever clearly and deliberately weighed the benefits of investing to mitigate tax with all of its risks, against the cost of simply paying what was owed, and having the peace of mind that the investment wasn’t in something that was riskier than Mr P had the tolerance for. For the reasons set out above, I’m satisfied Mr P’s decision to increase the risk he would take, was made on the basis of unclear, unfair and misleading information about the risks involved. I’m also satisfied the only reason he’d been willing to take the higher risk level than his normal balanced approach was the tax benefits. So, I’ve considered what he’d have done differently had clear information been given, and to do this I’ve weighed up the tax benefits against the risk involved. His options were to either: • Pay the CGT he owed and keep £60,000 to save or invest, or • Put £60,000 in the EIS portfolios to possibly pay £12,300 less in CGT (provided the CGT allowance remained the same or increased, and the EIS didn’t make a gain). However, the risk involved would be significant and he could lose most or even all of the amount invested as he wouldn’t benefit from income tax relief. I can’t imagine that Mr P would have risked losing most or all of the £60,000, even for the CGT benefit, had he truly understood the risk involved. I’m satisfied that he didn’t have the attitude towards risk to take the level of risk involved here, so I’m persuaded he would have simply paid the tax, had everything been set out clearly. I find that Fairstone should put Mr P as close to the position he’d be in now, had the investment not been made. I’ve set out below how the return on the investment ought to be calculated, assuming that Mr P would have instead invested this money at a level of risk he was comfortable with. I can see that Mr P has asked for the costs of an accountant to be awarded and he’s provided an example invoice showing how much a previous year’s accountants costs were which I can see was for supplying his end of year accounts. I’m not convinced that he will incur extra costs as a result of this situation, as he is self-employed and regularly uses an accountant’s services when declaring tax anyway. If he wishes to seek an accountant’s advice on the impact of any redress, that is up to him, but is not something I would make an award for in these circumstances.” I went on to set out that Fairstone should compare the performance of the EIS with the performance of the FTSE UK Private Investors Income Total Return Index, to assess whether there had been any financial loss. As the EIS was illiquid, I set out that its value should assumed to be zero, and if possible Fairstone should take ownership of the portfolios. If that wasn’t possible, then I set out that Fairstone may request an undertaking from Mr P that he repays to Fairstone any amount he may receive from the portfolios in future. Replies to my provisional decision Mr P accepted the decision but set out that his preference would be for Fairstone to take over ownership of the portfolios. He said he’d spoken to the portfolio provider who had said that transfers of ownership can generally be carried out, but they would prefer to review any proposal from Fairstone before confirming their position. Our service let Fairstone know about Mr P’s reply and asked if they could confirm whether they’d be willing to take ownership, as this would allow for a clean break for both parties. We didn’t receive a reply by the deadline given, so I have decided to proceed with my final decision, to avoid any further delays.

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What I’ve decided – and why I’ve considered all the available evidence and arguments to decide what’s fair and reasonable in the circumstances of this complaint. Having done so, as Mr P has accepted the provisional decision and I’ve not received any further submissions from Fairstone, I see no reason to depart from the findings set out in my provisional decision (copied above) and I make them final. Fair compensation In assessing what would be fair compensation, I consider that my aim should be to put Mr P as close to the position he would probably now be in if he had not been given unsuitable advice. I take the view that Mr P would have invested differently. It is not possible to say precisely what he would have done differently. But I am satisfied that what I have set out below is fair and reasonable given Mr P's circumstances and objectives when he invested. What must Fairstone do? To compensate Mr P fairly, Fairstone must: • Compare the performance of Mr P's investment with that of the benchmark shown below and pay the difference between the fair value and the actual value of the investments. If the actual value is greater than the fair value, no compensation is payable. • Fairstone should also add any interest set out below to the compensation payable. Income tax may be payable on any interest awarded. Portfolio name Status Benchmark From ("start date") To ("end date") Additional interest £60,000 invested in EIS Still exists but illiquid FTSE UK Private Investors Income Total Return Index Date of investment Date of my final decision Not applicable Actual value This means the actual amount payable from the investment at the end date. If at the end date any asset is illiquid (meaning it could not be readily sold on the open market), it may be difficult to work out what the actual value is. In such a case the actual value should be assumed to be zero. This is provided Mr P agrees to Fairstone taking ownership of the illiquid assets, if Fairstone is able to. If it is not possible for Fairstone to take ownership, then it may request an undertaking from Mr P that he repays to Fairstone any amount he may receive from the portfolio in future. For clarity, I expect Fairstone to do what they can to take ownership of the portfolios, to allow both parties closure over the situation. Only if they find this isn’t possible, then they may request an undertaking, but they will need to give Mr P clear reasons for this.

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Fair value This is what the investment would have been worth at the end date had it produced a return using the benchmark. Any withdrawal from the EIS should be deducted from the fair value calculation at the point it was actually paid so it ceases to accrue any return in the calculation from that point on. If there is a large number of regular payments, to keep calculations simpler, I’ll accept if Fairstone totals all those payments and deducts that figure at the end to determine the fair value instead of deducting periodically. Fairstone must pay the compensation within 28 calendar days of the date on which we tell it Mr P accepts my final decision. If Fairstone fails to pay the compensation by this date, it should pay 8% simple interest per year on the loss, for the period following the deadline to the date of settlement. Why is this remedy suitable? I have decided on this method of compensation because: • Mr P wanted capital growth and was willing to accept some investment risk. • The FTSE UK Private Investors Income Total Return index (prior to 1 March 2017, the FTSE WMA Stock Market Income total return index) is a mix of diversified indices representing different asset classes, mainly UK equities and government bonds. It would be a fair measure for someone who was prepared to take some risk to get a higher return. • Although it is called income index, the mix and diversification provided within the index is close enough to allow me to use it as a reasonable measure of comparison given Mr P's circumstances and risk attitude. My final decision I uphold the complaint. My decision is that Fairstone Wealth Management Limited should pay the amount calculated as set out above. Fairstone Wealth Management Limited should provide details of its calculation to Mr P in a clear, simple format. Under the rules of the Financial Ombudsman Service, I’m required to ask Mr P to accept or reject my decision before 24 April 2026. Katie Haywood Ombudsman

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