There has been a great deal of regulation on the issue of suitability. Layer upon layer of rules addressing it have increased the cost of running a business and the appalling level of paperwork clients are assaulted with. It couldn’t get any worse, could it? Sadly, it probably will.
Client vulnerability is an area the FCA has been looking at for a number of years, publishing a report in 2016 and now threatening to consult next year. There have been many cases where firms have treated vulnerable people with utter contempt. But my fear is that, once the FCA gets around to doing something, it will involve yet more paper and cost, for little benefit.
The combined impact of increasing longevity, abolition of the compulsory retirement age and pension freedom means people will have more complex financial affairs later in life.
As recently as 2000, the majority retired at 60 or 65 on a defined benefit pension or an annuity. Today, few have adequate defined benefits to retire fully at that age and many simply do not wish to.
A 70-year-old running a business may not be vulnerable today but is more at risk of disabling illness than a 50- or 60-year-old. Their financial affairs are likely to be complex. On retirement, drawdown will probably replace the previously common annuity. This has significant consequences for advisers.
The costs of drawdown where the objective is purely provision of income are often too high.
Adviser charges at 100 basis points plus total asset management, and platform charges often exceeding 200bps mean the equity premium is all but consumed, defeating the point of the exercise. So further increasing cost by introducing yet more regulatory process for the identification and management of potentially vulnerable clients could be counterproductive.
What is the alternative? There are two strands to my solution.
First, treat the customer fairly. Regardless of vulnerability, a client given appropriate advice by a competent adviser is unlikely to be in a bad place. Most cases of mistreatment involve advice that was clearly inappropriate.
Second, the answers already exist. As the outcome of bad advice to a vulnerable client is likely to end up in litigation, it seems appropriate to look at how lawyers deal with the issue. They resort to law and the Mental Capacity Act 2005. This was written for this very purpose and it is dangerous and ludicrous to ignore it.
The FCA Financial Lives Survey estimates 50 per cent of consumers are potentially vulnerable. This is the sort of silly number one normally expects from insurers flogging products. It is not helpful.
I will come back to this issue, as it is not going to go away. I do hope some wise heads will attempt to identify the true scale of the problem and see to what extent it is covered by existing regulation, such as TCF. In the meantime, I would suggest all advice firms adopt a written strategy laying out their practice for dealing with vulnerable clients and stick to it – and TCF guidelines – religiously.
Clive Waller is managing director at CWC Research