In June 2015 the FCA released Factsheet 035 for advisers, setting out its views on pension reforms and insistent clients. This was prompted by the pension freedoms legislation. The issue has been in the news again as the FCA embarks on another suitability review, asking firms for a significant amount of information including data on insistent client cases.
Insistent clients put advisers in a difficult position. Many will be uncomfortable in assisting a client to do something that goes against their advice, and the easiest and lowest risk course of action is simply to seek to charge for the advice (regardless of outcome) and then cease to act if a client refuses to accept it.
On the other hand, advisers may take the view that a genuinely insistent client should be entitled to do what they wish with their money and, if they are going to do it anyway, the adviser can at least make sure they can then work to try to protect the client’s interests as far as possible. There is also, of course, the issue of regulatory risk and the view the FCA may later take on any insistent client transaction.
Insistent clients are not defined in the FCA Handbook but reading both the factsheet and Financial Ombudsman Service final decisions concerning them should give firms some reassurance that both appear to be acting fairly consistently.
The key messages in Factsheet 035 were clear. Firstly, follow the usual advice process and make a suitable recommendation. If a client states they need cash, then it is incumbent on the firm to investigate further, determine why they need cash and if options other than accessing it from their pension may be available. As with any piece of advice, the firm must really understand the client’s objectives. This is a crucial part of the process and the suitable recommendation made should be self-contained.
If the result of that process is that the firm gives advice the client wishes to ignore, the firm is then into a separate process. The firm must make it clear to the client that if they proceed with their desired course of action, this is against the firm’s advice. The firm must then make very clear what the risks associated with the client’s desired course of action are. It is clear that if the client uses their own words to describe why they wish to proceed against the firm’s advice, this holds a lot of sway with the FCA and the FOS.
What the FCA and the FOS clearly do not find compelling is when a firm advises a client not to transfer or take pension benefits, designates them as an insistent client and goes on to make a further recommendation on that basis, all as part of the same process and often in the same document.
The consistent theme in the FOS decisions is that this is confusing for the client and often looks like the firm has a pre-determined process into which they are being shoe-horned. This is exacerbated when a client is immediately asked to sign a standard form of insistent client disclaimer.
If a firm wishes to operate in this area, time spent reading the factsheet alongside the relevant FOS decisions should enable them to design a process that does not expose them to unnecessary risk.
However, this presupposes the client is willing to pay for detailed advice they will want to ignore. Perhaps this is the rub here. Compelling clients to seek what they consider to be expensive advice they do not need will always create tension.
Some of the FOS decisions indicate some firms had poor processes that pre-dated the pension reforms.
But while it is not always the reforms that caused the problem, they have inevitably made it more common. That said, with a little care, firms seeking to do the right thing do not have to turn away insistent clients.
Alan Hughes is partner at Foot Anstey LLP