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Alan Lakey: The perils of relying on execution-only

 Over the years I’ve been contacted by numerous compliance consultants, seers and experts of one sort or another who have attempted to point my firm in the ‘right direction’ to avoid regulatory opprobrium and the potential for complaints.

These theorists tend to focus on mitigating risk by setting out client requirements in plain English whilst explaining all benefits and pitfalls in a balanced manner. Such tactics have led some advisers to send 30 page suitability letters with appendices and brochures sufficient to disturb even the most laid back woodsman.

The truth is that complaining has now jumped ahead of bingo as a national pastime. With the help of claims mongers, a liberal sprinkling of fraudsters and opportunists, and under the benign gaze of the FOS, this behaviour looks likely to worsen before it gets better.

The recent focus on execution-only is timely because I have been made aware of a Yorkshire-based firm which, having survived thirty complaint-free years, has been targeted by a claims monger and two toxic clients.

Back in the 1980s the adviser was separately approached by these two individuals who expressed great concern that their employer was going bust and that their pensions would be forfeit.

They each asked the firm to transfer their funds into a personal plan and the firm agreed to do this on an execution-only basis.

With hindsight the adviser made a serious error by selecting a suitable pension provider.

To him this seemed both sensible and reasonable as the clients had little knowledge of pension providers.

Subsequently the firm transferred the clients into lower charging stakeholder pensions and arranged investments for them.

Jump forward 20 plus years and the individuals approach or are approached by a rabid claims monger which deduces that for a 25 per cent fee it can get them some of that lovely compensation that PPI policyholders have been wolfing down for some time.

The claims monger wrote to the firm listing numerous allegations, some of such startling imbecility as to trigger care in the community officers into writing urgent reports.

The firm replied explaining that the pension transfers were execution-only and rebuffed the other defamatory claims. They also suggested that the claims monger get its facts right before levelling allegations.

This elicited an excited response brim-full of threats that the regulator would investigate them with enforcement consequences. I brought these tactics and the letter to the attention of the MOJ yet, despite promises to investigate, the firm continues trading.

The allegations were escalated to the FOS which took copies of the files and in depth responses explaining in detail what had occurred and why the complainants, in those pre pension-protection days, had genuine concerns.

The FOS responded that it did not consider the transfers to be execution-only due to the adviser selecting a provider. It also issued its standard paragraph outlining how the lack of a longstop enabled it to assume jurisdiction of a twenty-five year old case.

The adjudicator reached a relatively quick decision upholding both complaints. Even though the file stated execution-only and the clients had signed to this effect the adjudicator found ‘insufficient evidence’ to support this.

As a consequence he considered that all subsequent transactions to be linked to the original advice and the adviser may have to pay tens of thousands of pounds – not in compensation but in PII excesses on each of the individual complaints.

The case will now go before an ombudsman who just might use common-sense and make a sensible judgement although personally I feel as confident as when I’ve made my Grand National selections.

Alan Lakey is partner at Highclere Financial Services

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Comments

There are 23 comments at the moment, we would love to hear your opinion too.

  1. The correct outcome for the case may be that it is correct to be defended… however based on the information in the article the appropriate defence is not one of execution only and by relying on such a defence, the firm in question have seriously weakened their own position.

    If however, the defence was positioned as to the standards of the time it was felt no advice was given other than to choose a provider, but the firm recognise that in hindsight the sale would be deemed as advised and the defence went on to argue why the action taken at the time was both what the customer wanted and needed in their circumstances… then the firm would give FOS a chance of finding in their favour.

    It would be hard to rely on the submission of a firm, who according to the information above, still do not understand the environment they operate in after 30 years.

    I sympathise with the firm… however I hope for their sake that Alan’s response to the ombudsman will be more tempered and coherent than the above.

  2. We have never done execution only because it was clear that this meant the client chose product and provider. I am surprised that the advisers were not aware of this requirement and while I have a loathing for claims companies in this case it is not a clear case.

  3. Julian Stevens 8th May 2013 at 1:13 pm

    What you’re describing Alan sounds like Best Execution, whereby the client goes the adviser, states what he’s already decided he wants to do and the only guidance he requires is the most suitable product and provider to facilitate that course of action.

    He doesn’t require (and therefore absolves the adviser from responsibility for) advice on whether or not the course of action he’s already decided he wishes to pursue is or is not appropriate or likely to be in his best interests.

    From the story, as set out here, it appears that the FOS is unaware of that not insignificant distinction.

    Then again, the entire regulatory system appears to be stacked against the IFA, not just now but until our dying day.

  4. If the client was truly execution only (s)he would have also instructed which company to transfer to. I dare say, the adviser also recommended which funds?

    Maybe its time to call it a day Alan, or at least until you understand the topics you are writing about.

  5. Guilty until proven innocent in our line of work.

  6. The regulations don’t allow for the adviser to choose which parts of the process they advise on, Julian. It’s unfortuante and I dread to think how many people are stuck in an Equitable Life pension as a result, but the powers that be won’t allow IFAs to provide ‘limited advice’ on this basis. I worked in the compliance team at a network a number of years ago and thankfully the advice we were giving out was correct, in order to avoid the issue Alan has described above.

    Strangely, had they advised the client not to move their pension but the client had disagreed, the adviser could have consluded the transaction on an insistent client basis.

  7. “With hindsight the adviser made a serious error by selecting a suitable pension provider.”

    Much as I sympathise and think the client and claims company have behaved reprehensibly, the adviser got it wrong. It doesn’t matter whether it was intentional or not.

    I’m afraid I don’t agree with the Best Execution point. That means obtaining the best price in a given transaction. The bit where you make a product selection is advice albeit limited to product selection.

    My argument would be that the advice was limited to product selection only because that’s all the client wanted. Whether it was right to transfer wasn’t advised on. I don’t think you would be able to argue that under the current rules but you could under the rules in force at the time.

  8. Hampshire Yokel 8th May 2013 at 2:56 pm

    Twenty-five years ago I too had clients that contacted me asking to transfer their pensions away from their employer’s arrangements. One group of retail managers from a (then) leading electrical retail chain raised the question following ‘coffee machine’ discussions at manager’s meetings. It seemed that some of the managers had been advised to transfer their pensions away from the employer’s scheme into personal pensions and they were then promoting this as the right thing to do to their colleagues.

    I agreed to take the documents away and look at them. I did not agree to conduct the transactions on an execution only basis and explained my reasons to the clients; I was the professional adviser and such a transaction should not be undertaken without advice. I explained that their area of specialist knowledge was not financial services and was not pensions, but that it was mine.

    I took the scheme booklets away for review and, a couple of weeks later, went back and advised them all to stay in their company sponsored schemes.

    I would not expect to go and see my doctor and specify the drugs I’d like him to prescribe; I’d explain my symptoms and ask him to recommend a course of action that would meet my needs. That may be a little ‘whacky’ an analogy, but I think that a professional adviser would understand the value of the service he / she offers ad would ‘sell’ this in order to convince the client to obtain professional advice.

    At best, this scenario would be described as ‘limited advice’, whereby the advice was limited to the selection of an appropriate provider. However, it should be expected that any professional adviser would point out that a transaction that a customer wishes to was potentially unsuitable, if this were the case.

  9. In 38 years I’ve never met an IFA (including me :)) who can keep his “gob” shut long enough for it to be execution only!!

  10. In my opinion there is no such thing as ‘execution-only’ when a professional adviser is involved.

    A client can always come back (and will if a CMC is behind them pushing for it) and claim that they thought the adviser was agreeing with them and therefore providing advice. I think the FoS is going to side with a client in that case.

  11. Exactly nic
    The same applies to MAS
    personal opinion gets in the way!
    will MAS have a longstop?

  12. Incompetent Regulators Award Team 8th May 2013 at 3:47 pm

    Funny how people see things differently. Hargreaves Lansdown have built a business with £35 billion under mngt on an execution only basis, including final salary transfers, use smoke and mirror techniques to sell and cream off more of client money over many years, shout about it (can’t keep gobs shut) and get away with it.

    Regulations are a 1st class joke………………

  13. Hampshire Yokel 8th May 2013 at 3:50 pm

    Nick

    Love your post!

    After my 6 1/2 years as an adviser in this industry, the company through whom I provided advice was taken over and I did not like the new management team. As a short term measure, I took a role in a compliance department at a major product provider whilst I considered my future.

    Although I had intended on returning to the role of providing financial advice, I ended up developing my compliance career; much by accident.

    In one of my roles, at an IFA Network, EO business was only permitted with the individual approval of the compliance department. Such approval would only be given if the adviser could evidence that the customer had the necessary knowledge and experience to make their own financial decisions and if the compliance team was satisfied that the product area was not one where there was an increased risk – such as with pension transfers and opt outs.

    Such permission would not have been granted when dealing with individuals wishing to opt out of an employer sponsored scheme; advice should be considered an absolute necessity in such cases.

  14. out of interest did the employer go bust?, if so what would have been the outcome if they had remained in the scheme and would this have any bearing on the complaint process?

  15. @ HM

    Yes it would make a difference because you have to show loss to have a valid claim. That’s true with the FOS and in law… one instance where you should get the same result from both!

  16. Simon Mansell 8th May 2013 at 4:53 pm

    Look “Execution Only” is the future! You can ignore compliance, analysis, hours of work, huge fees, retrospective reviews and a litigious consumerist lobby – you even get commission a Knighthood and inclusion in the Times Rich list!

  17. I have only done one bit of execution only in 15 years and the customer came wanting to do x amount in to x existing bond and didn’t want my advice e. Bond was sold by a retired adviser. I made sure in KYCj enough for my purposes and no more by phone. I am inclined to agree with Grey t area and Simon. I looked Nick’s post and as I struggle to keep my own mouth shut (you’d never know 🙂 ) I record the meet ring from beginning to end so I can prove what I have advised. I do think the issue of HL and execution only though is a very interesting point though. What would happen were it a complaint about HL I wonder instead? This is why FOS decisions need to be published and set a precedent so that HL are treated the same as and other execution only business.

  18. Advised execution only advice 8th May 2013 at 9:45 pm

    Here is the latest “Execution Only” non advice advice mailshot:

    I thought you might be interested in our latest XYZ show on pensions and retirement. Our Head of Advice (non advice), Mr XYZ I will answer some of our clients’ most common questions, such as:

    • What’s better, an ISA or a pension?
    • How much should I contribute to a pension?
    • What’s the best way to take an income from my pension?
    • And many more…

    Watch XYZ TV »

    This video should be helpful to anybody who’s building an income for their retirement (but who doesn’t want advice) – whether that’s just around the corner or many years away.

  19. John Blackmore 8th May 2013 at 10:25 pm

    @Nick – either poor sense of humor or an insult to many.

    This case was never EO – no matter how far back in history you go. Client must give precise details – which includes company, funds, amounts etc

  20. Dathan Steele 8th May 2013 at 10:39 pm

    So, let’s look at this. The PIA’s view (and whatever the Regulator is called this week) is that E.O on occupational transfers should be treated with ‘justifiable skepticism. This means that unless the client has the skills/knowledge etc to understand what they were doing, then this should NOT be transacted. The case above though is not even that. As another blogger says, as soon as you do anything apart from transact the instructions of the client you are in the ‘advice’ world.

    The Regulator’s insistence on ‘professional duty of care’ (look it up if you don’t know what that means!) has the effect that any E.O that is remotely complicated is FOS fodder.’

    For me, the only ‘safe’ way of doing E.O is to have a separate company which does not even have advice permissions, all all the website and advertising makes it clear that this is a pure E.O service. Even then this is dicky, as Joe Public thinks that Mark Dampier on Moneybox is giving them advice!

  21. RegulatorSaurusRex 9th May 2013 at 10:41 am

    ExecutionSaurusRex isn’t merely retrospectively extinct in this case, it simply never existed.

    There is no such thing as execution only, if you can’t justify the investment decision you shouldn’t arrange the contract.

  22. I agree with Dathan Steel, hence why I have only ever arranged one execution only contract. I have done a lot of direct offer Group Pension business and a fair bit of limited advice especially when someone is adamant they don’t want my first choice advice which may be a pension, but the client insists on not using it or an annuity which can sometimes be an ethics issue on the part of a client. I do think HL are sailing close to the wind and the FOS being a law in to itself means it is highly likely HL will get fingers burnt at some point.

  23. The issue may appear clearer today but this was a 1989 transaction – before the more detailed PIA and FSA rules and guidance.

    The issue seems clear – client requests a transfer and opt-out because he is very concerned that his employer was going under. At this point in time there was no protection for such situations so the chaps concerns were very real.

    The adviser who never did opt outs or final salary transfers agreed to assist on the basis that he gave no advice regarding the merits of the transaction.

    Client wanted a provider to be selected so adviser obliged.

    Should this mean that, 24 years later with the 20/20 hindsight that the FOS enjoys and that some clients suddenly obtain when the prospect of compensation rears its head, that the adviser should be considered guilty of mis-advice?

    The methodology of the FOS requires a fundamental shake-up if they decide the adviser is guilty.

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