Networks and compliance experts are warning advisers against using ‘insistent’ customer processes to appease clients trying to transfer out of defined benefit schemes.
Likewise, trade bodies say allowing people to proceed against advice is like “handing a revolver to someone who talks about committing suicide”.
But the Government is standing behind its ‘freedom and choice’ agenda and says people should be able to act against recommendations.
Although the Financial Ombudsman Service has laid out how customers should be dealt with, advisers are fearful of a regulatory backlash in the future.
Yet turning down long-standing clients’ requests could be a step too far for advisers concerned they will take their business to less scrupulous firms.
So should advisers trust the FOS’ assurances that if they execute transfers in the right way they will be safe from claims? Are providers willing to accept transfers without a positive recommendation? And will the Government’s popular pension reforms come unstuck as millions of members of DB schemes find their access to the freedoms frustrated?
This week support services firm SimplyBiz sent a note to advisers warning them not to transact requests from clients insisting on transferring despite an adviser concluding a move would not be in their best interests.
The note, seen by Money Marketing, says the firm is “concerned about mixed messages from FOS and the FCA” and warns “acting against our advice could be a substantial risk to you and your business”.
Networks are also steering their members away from waving through actions they do not support.
Personal Touch Financial Services sales and marketing director David Carrington says: “We don’t see a place for an insistent client in effect overriding an adviser’s view. The client might be a long standing friend, but a new wife might talk to a claims management company and file a complaint years later. Painful as it may be, they should walk away. It’s not the risk of how the world looks today, but how it could look in five years.”
Sense Network chairman Steve Young says: “Our members are very aware of the potential risks and we do not know of any adviser who would wish to execute deals which they did not consider to be in the customer’s interest.”
Personal Finance Society chief executive Keith Richards says advisers should “just say no” to requests.
He says: “Insistent client process has been used in the past. Some believe it is an appropriate process but I’d suggest that was better used pre-RDR and shouldn’t be considered post-RDR. There are other opportunities for advisers to consider.”
Apfa director general Chris Hannant says the trade body plans to seek clarity on insistent transfers from the FCA.
He says: “You don’t give a loaded revolver to someone who says they are thinking about suicide, and a similar principle could be applied to transfer requests.
“But advisers need to know exactly where they stand on this and in the current environment you would be a very brave person to go ahead and process a transfer when you have advised against it.”
The FOS says it expects a letter “in the customer’s own writing” confirming they want to proceed despite not having a recommendation and that they have “full knowledge” of the risks.
Clients should also list the reasons given by the adviser and explain why they need access. It also notes recent FCA guidance which gives repaying a mortgage or loan or making a “suitable” investment as examples of “rational” reasons for using a lump sum.
But regulatory consultant Richard Hobbs says despite the FOS’ assurances, insistent pension transfers are “just too toxic” and in any case have never been part of the regulator’s rules.
He says: “On the one hand Chancellor is producing all kinds of freedoms, on the other hand the regulator has made it impossible to deal with insistent customers.
“The Ombudsman is right in its approach, but it’s too risky for advisers. The regulator has given off enough signals and insistent customers just have to be ignored.”
While networks and compliance specialists are standing firm, advisers on the front line may find themselves under intense pressure after April as millions of people assume they will be able to take advantage of the new flexibilities.
Last month, actuaries Hymans Robertson surveyed 500 employers with DB schemes and found on average they expect about a third of members will try to transfer some or all of their pension to a DC scheme. In 2014 there were about 11 million people in DB schemes.
Under FCA rules, members with pots worth £30,000 or more will be first required to take advice from someone with a pension transfer specialist qualification. As announced in the Budget, the Treasury is also considering extending this to make advice mandatory for people considering selling their annuities.
However, the Treasury consultation says “people would still be at liberty to choose not to accept a recommendation”, suggesting the Government is comfortable with people acting against the judgment of advisers.
Threesixty managing director Phil Young says this is a rare example of the Government relying on advisers and that the industry should take the opportunity “to ask for something in return”.
He says: “This is the only occasion I can remember where the Government needs advisers to push something through, and they should be asking for something in return – the trade bodies should ask the Government to make the FCA give clear guidance on this issue.”
Pension providers appear reluctant to accept clients without a positive recommendation.
Standard Life, Fidelity and Sipp provider James Hay all say they will not take in members acting against an adviser’s wishes, meaning thousands may find even if advisers do process transfers there may be a dearth of providers willing to receive funds.
But with the election less than two months away, that may be a problem for another Government.
Tim Page, director, Page Russell
I understand the natural instinct of advisers to want to help their clients but as a business owner I’d say we’re not going to touch this with a bargepole.
I can see in certain circumstances how advisers might feel pressured but they need to be strong enough to realise it’s their job to advise not take orders, and if it’s not in a client’s best interests then they shouldn’t do it.
One off business is generally higher risk and insistent pension transfers are higher risk still. In the current environment advisers would be well advised to steer clear if they value their professional indemnity insurance.
Tristan Brodbeck, director, Tristan Brodbeck Financial Planning
It is every individual’s inalienable right to ignore common sense, cash in their pension, pay all the tax they would have paid throughout their retirement in one fell swoop, then plough the money into buy-to-let properties at the top of the market. In fact, if they don’t I suspect Osborne will be disappointed. It’s also every IFA’s right to tell these clients where to get off. In 10 years’ time we’ll look back at this and marvel at the Chancellor’s recklessness.
The evolution of financial advice into a profession can be measured on so many levels: trust among existing clients, acknowledgment by the regulator and increasing understanding and recognition by the Government.
Pension freedoms undoubtedly represent an opportunity for the sector but they leave advisers open to being targeted as a facilitation service by “insistent” clients.
A compulsory requirement for professional advice is the logical answer to complicated and high-risk issues, such as DB to DC transfers. However, despite the complexity of such transactions, the Government says people will still be at liberty to choose not to accept the advice they are given – without inferring that an adviser should be involved in facilitating a non-suitable recommendation.
Meanwhile the FOS believes consumers cannot reasonably be expected to understand the complexity and associated pitfalls unless, of course, they have equal or greater knowledge than the adviser.
But surely the fact a client would pay for advice and then ignore it should rule out any further interaction? Consumers are being referred to professional advice for good reasons. Facilitating potentially irreversible poor outcomes is not one of them.
Even if it is highly improbable an IFA would sanction something that went against their professional recommendation, the danger is clear. Obtaining an “insistent” client declaration and documenting the risk warnings in a suitability report will not protect against future liability in the event of a claim.
The increased respect the advice profession has earned must not be compromised by putting commercial opportunity before professional ethics.
Keith Richards is chief executive at the Personal Finance Society