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Alan Hughes: Why firms do not need to turn away insistent clients

Alan Hughes

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 

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Comments

There are 16 comments at the moment, we would love to hear your opinion too.

  1. I have been saying this since pension freedoms were introduced. Sadly we have PFS saying walk-away, networks putting own liability before customer choice and a few crooked advisors tainting the view of everyone. The crux for me still is- whether the customer is entitled to expect advice based on achieving their objectives or whether the advisor should have to ignore this and advice purely on financials and force customer to take an insistent position- removing their regulatory protections, when there should be a more customer friendly mechanism for agreeing objectives and solutions. There are often multiple ways of dealing with solutions before even getting close to unsuitable solutions- we need to go back to the definition of suitable advice as this seems to have got very confused

    • Jane you are correct the networks do put their own liability before customer choice. They are dead right too. If it didn’t then the likelihood is that the network will go out of business, putting all the other advice firms and more clients in harms way for the sake of a minority of people who (as Sascha says) only come to the adviser to get a piece of paper signed. That does not make good business sense at all. Until the regulator gives us a cast iron guarantee that all insistent clients do this at their own risk, have absolutely no protection under regulations and upon transacting the business against at the advice of the adviser they also give up the right to complain about the advice. They should further instruct the FOS to remove complaints form this line of work from it’s remit. For all the number of cases that this is likely to be in the scheme of things the FCA should not really be worried, but in their own usual way are trying to protect everybody from everything all of the time which utter madness.

  2. I don’t think anyone is under any illusion that a firm is not allowed to serve insistent clients, it is simply that most of them don’t want to. From reading the experiences of others – on both sides – I have drawn the following conclusions about “insistent clients”:

    – They tend not to be long-standing clients of the IFA or recommended by one, but those who “walk through the door” – often after having been previously turned away by other IFAs.

    – They are not seeking advice on the best course of action, but have already decided on the best course of action and are only in the IFA’s office because the Government’s rules have forced them to. They have not decided on this course of action through reasoned consideration but on impulse – an impulse such as something they read in the Daily Mail or what someone in the pub told them or something that just popped into their head. Traits associated with people who live their lives on impulse include: belligerence, rudeness, passive-aggression, paranoia and a total lack of self-awareness. These make them unpleasant to deal with and the last makes them a classic “complaint waiting to happen”: as when they realise they’ve screwed themselves they will immediately look for someone else to blame.

    – Even if the IFA decides he wants to provide advice to this person despite the aforementioned obstacles, extracting a fee for this advice is going to be even more difficult. The client does not value the advice and resents having to pay for it. There is unlikely to be a long-term relationship which means that advice will either have to be paid for in advance (which the client will be disinclined to do when he knows it will not be what he wants to hear) or via invoice (which the client will have to be chased for). The sort of client who wants to cash in his pension because he is up to his eyes in debt for no good reason will think nothing of paying for advice with a bouncing cheque.

    All these factors add up to form a client which most IFAs would be inclined to consider more trouble than he is worth even if the FCA and Financial Ombudsman Service didn’t exist. IFAs are a mostly independent breed and one of the highest pleasures of owning your own business is to turn business down.

    • Whilst I appreciate what Jane Hodges is saying, I entirely agree with you. As Harry Katz has often said he has done, I am very cautious about taking on new clients and try to avoid transactional business.

  3. I think I’ll stick to the safe procedure. This my advice. Take it or leave it. End of.

  4. I think that is the rub Alan, customers (let’s not call them clients) don’t want to pay to receive advice that they wish to ignore anyway (why would you?). If they did, they may just change their thinking, but the main body are those who are turned away by providers and just require a signing off process via an adviser. Advice charging in these cases is as much about the need to factor in potential liability as it is time spent, especially as there is no ‘client’ relationship involved and therein lies he issue… One would have to be desperate to take on a one-off case where the fee didn’t afford sufficient protection against future liability. Let’s remember, the advice sector did not create this problem and it is afforded no ‘robust’ support in its endeavours to resolve the issue. We can do this, we just need a rigid framework that avoids any guesswork which, with all due respect, your solution still entails

  5. Terry Mullender 10th August 2016 at 6:57 am

    This article assumes that both the FCA and in particular the FOS will act both reasonably and impartially, given the guidance that has already been provided by the FCA. Sadly we all know that the FOS is a loose cannon, and can behave both illogically and erratically.

    Until we have a guarantee that a client who proceeds against the advice of a financial adviser will not be able to complain, I will not be transacting “insistent client” business.

    • I agree Terry, FOS is the problem and lack of legal precedent. There are cases upheld by FOS which conflict with case law such as Nestle v Natwest and the FOS refuse to clarify hkw their decision squares the legal position, which makes advising other clients (even long term ones difficult). The case I refer to an adviser took on a new client who got cold feet 1 year later. Taking on new clients is the biggest risk, due to FOS decisions. it would be interesting if there were statistics of whether complaints were mainly related to customers rather than clients.

  6. Alan it is all far and good you stating the obvious facts that SHOULD make it ok for a firm to be an implementer for an insistent client. HOWEVER the word SHOULD is not good enough. No matter how we try to do separate the processes from advice (i.e. do not do this) and the transaction the FOS are very likely to pick handpick and pick until they find some reason to find in favour of the customer.
    I would be interested to know how legal firms would act if they were in the position advisers find themselves in. If that legal firm had an over-seeing body that every lawyer in the land knew was likely to find fault in the process the lawyer had when acting for his/her client in order to find in favour of the complainant. Somehow I don’t think you would be quite so positive if your firm could be put out of business for complying with an instruction, advising against it but then doing it on an insistent basis.

  7. Why transact it? You have given advice. If they wish to proceed you do not have to transact it, only sign to say you have given advice. Unless you are still one of the % merchants that want part of fund. Get client to pay up front, pointing out that you will charge for the advice regardless of outcome.

  8. Firstly if the FCA and FOS do not recognize an “insistent client” then quite simply nor should we ……. to do so is entirely at your own peril !

    To take this to the extreme ponder this… if you were an owner of a gun shop, a customer comes in who is known to be a suicide risk, would it be OK to sell him a gun but not the bullets, the bullets but not the gun or just because he kicks up a fuss, both bullets and the gun ?

    You know when the inevitable happens……. the paper trail will come straight back to you and all the disclaimers, bold headings and excuses, true they maybe, will not help you !

  9. Julian has put it succinctly. Mr Hughes must be desperate to meet his sales targets. An insistent client is one who presumes to know better than a qualified adviser. As such he must be either desperate or thick. Not exactly the type of client that an adviser would warm to and the risks are astronomical because these sort of people, by their very nature, are the first to complain.

  10. @Jane Hodges
    “Sadly we have the PFS saying walk away”
    Rather than making an emotional judgement, perhaps it would be better to understand why the pre-eminent professional body (not a trade association) in this area is saying this? I doubt it was on a whim. I suspect the reasons are similar to what has been articulated by the other contributors.

  11. You can certainly do insistent customer business. The rules and the law do allow you to. However, good legal and compliance advice to the IFA sector is as indicated above by Harry and others that you do not do things that put your business at risk and which are neither good for clients or yourselves.

  12. Ask yourself this: why would a lawyer – who earns a (good) living from resolving disputes – tell you it’s OK to do insistent client business? As usual, I find myself in complete agreement with the perennially wise Adam Samuel.

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