Ian Cockerill: How to handle insistent clients

CockerillIan

While the politicians, media and individual pension holders seem enthusiastic about the idea of freedom and choice, it appears the regulator is less keen.

Those of us who lived through the pensions scandal of the late-1980s will remember that the government that suggested and allowed changed in the first place (including a “free the chains” TV campaign) suddenly became a lot less supportive when the consequences started to emerge.

Compensation to individuals who left their company pension scheme to take out a personal pension is still being paid to this day. No surprise then that the idea of taking a pension fund as some sort of lump sum is being viewed with a jaundiced eye.

At the same time, the industry is being criticised for requiring payment to advise those who want to take this course and clients themselves are pressurising advisers to let them have their money. This has led many advisers to raise the question of the insistent client.

In common sense terms an insistent client is an individual who receives advice on their financial arrangements and, on delivery of a recommended solution, rejects that advice and instructs the firm to carry out a different solution based on their personal requirements.

This is different to an execution-only instruction, where the client will provide, at outset, a specific request for a financial arrangement without the need for financial advice. The FCA as describes this type of transaction as:

“…a transaction executed by a firm upon the specific instructions of a client where the firm does not give advice on investments relating to the merits of the transaction and in relation to which the rules on assessment of appropriateness (COBS 10) do not apply.”

It is worth noting that there is no regulatory definition for an insistent client. However, if you think you are dealing with one, I believe you need to take a three-stage approach:

Stage one

Proceed as you would when providing advice to any client. For confirmation, this should include the following:

  • Providing the client agreement (disclosure of costs and services)
  • Completing a fact find
  • Assessing attitude to investment risk
  • Preparing research
  • Delivering a recommendation based on their needs, circumstances and objectives
  • Producing a suitability report to confirm this position

Stage two

Should the client reject the advice, a request should be made for them to prepare, in their own words, the reason for the rejection, awareness of the risks associated in this course of action and confirmation of the action they wish to take.

Risks associated with the action they wish to take could include:

  • Penalties on encashment/transfer/switch
  • Reduction of future benefits
  • Loss off existing/future benefits (death benefits, guarantees, bonuses, etc.)
  • Depletion of retirement funds/income

It is also recommended the spouse or dependents/beneficiaries countersign this declaration, as they can be considered an interested party in the transaction as well as for the future protection of the firm.

The Financial Ombudsman Service has previously commented that “breathing space” of a week would be expected on such cases.

Stage three

You should prepare a final letter to clarify you are acting on the client’s insistence and confirming the product, provider, fund choices or drawdown of funds if in a pension scheme.

This should also confirm the risks associated with the instruction. If it relates to the drawdown of a pension fund, it should make specific reference to:

  • Taxation
  • Sustainability of income
  • Impact on state benefits (welfare and social care support)
  • State benefit means testing – deprivation of capital

You should then include a disclaimer to highlight the client’s potential loss of regulatory protection, with wording similar to the following:

“You have chosen not to accept our original recommendation and you should be aware that by proceeding on your specific instructions you may not benefit from the protection of the rules of the Financial Conduct Authority on assessing suitability or from the Financial Ombudsman Service.”

Always remember that you are not under any obligation to process client instructions and you should always consider whether it is in the clients’ best interests (FCA Principle 6) and whether it is the firm’s commercial interest to proceed with the instruction. That can only be a decision for the firm but do be aware of the downsides before you decide to risk problems by attempting to be helpful. The advice we have given is that if you believe providing a certain service would be detrimental to the long-term financial wellbeing of the client, you should not be afraid to say no.

Ian Cockerill is compliance director at SIFA