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Simon Collins: Ethical Case Study

The scenario.

An adviser is dealing with a client who wants to transfer from final-salary scheme to a Sipp.

  • The client is director of group risk for the London office of an Irish finance firm.
  • The proposed transfer is from their Irish final-salary scheme where the funds are held in euros.
  • The administrators for the scheme have carried out a TVA in euros but are unable to change this to sterling.
  • The transfer value is €440,000.
  • As a result of the lack of information or a sterling-based TVA, the adviser has been unable to give advice on the viability of the transfer and has had to recommend that the customer should not transfer their benefits.
  • The customer has confirmed he still wants to transfer his benefits to a Sipp. The adviser has referred the case to his compliance officer.
  • The adviser is an appropriately qualified pension transfer specialist.

Email exchanges between the adviser and the compliance department

Adviser: I verbally confirmed to the client we would not advise on this transfer. However, the client wants to transfer and is happy to go against any advice. The client is happy to be treated as an insistent client. Can you please give some guidance on this, especially as we are dealing with a final-salary pension transfer?

Compliance: In theory, it is possible, given the circumstances, for you to proceed on an insistent client basis but as the transaction is a transfer from a final-salary pension scheme, I would be extremely cautious. There is no specific rule that prevents this being treated as an insistent client, it could be questioned by the regulator as to the nature and background of the client and their ability to be sufficiently knowledgeable to insist on a transfer from a final-salary scheme.

Cobs 19.1R provides detailed guidance on matters that must be taken into account. If the client insists on proceeding with the transfer against your recommendation, this should be confirmed in writing to the client, with an explanation of any particular disadvantages identified. You may want to consider if you are prepared to accept such business.

Adviser: This client does not want to leave his pension in Ireland. He has a very good understanding of risk per se. He lives in the UK and has no plans to move back to Ireland. He does want advice on a suitable UK pension to receive the transfer and we are recommending a Sipp to hold in cash for the meantime.

Compliance: As the client is UK-based and not returning to Ireland, then passporting is not an issue. The thing to do is to check with the provider that they are happy to receive the funds from the ceding scheme.

Sipp providers are generally very flexible in their approach, although they do reserve the right to decline an investment even if it is on the HMRC permitted list. I do not think we can introduce an element of execution only here as the client has received some advice. I would suggest the procedure be on a fully advised basis. If the client declines the advice, then he may become an insistent client to push through the transfer. Once the transfer is set up, he can then instigate his own investments within the Sipp with or without your advice.

If you do not provide this advice, then he could do them on a non-advised basis, which would allow you at least to ask some questions and provide factual information without advising. Execution-only would mean he states the exact terms and conditions of the chosen investments, which may be possible given his background but could also lead to possible detailed scrutiny by the regulator.

I cannot guarantee I will be able to check the file for you but if you can let me know when it is about to be submitted I will try my best to get is sorted out for you.”

What can we learn from this?

  • The compliance officer has compromised his position by suggesting to the adviser how he could classify the customer as an insistent client “to push through the transfer”. This is a concern as the compliance officer has not provided more “complaint” potential solutions.
  • The adviser appears to want to facilitate the transfer but is aware compliance will not sign it off as he cannot comply with FSA requirements for a transfer.
  • The adviser makes no attempt to put forward any rationale for the viability of the transfer other than the client wants to transfer to a Sipp and “has a very good understanding of risk per se”.
  • The compliance officer begins by summarising FSA requirements for this type of situation and suggests that the adviser “may wish to consider whether you are prepared to accept such business”. It would be up to the compliance officer to determine whether given the business’s strategy and approach whether the case should be declined or not.
  • The adviser has stated that he cannot advise on the ceding scheme, however, it should be remembered that advice on a pension transfer has to be concluded on the basis of review of the ceding scheme as well as the new scheme.
  • The compliance officer ends up providing the adviser with a route to get the transfer done and tells the adviser “I will try my best to get is sorted out for you”. Ultimately, due to the risks of this case it should have been a priority for review.

The compliance officer has compromised his position and put himself and his firm at risk of regulatory intervention as well as helping to facilitate a transaction that is unlikely to be in the client’s best interests. The FSA’s latest missive in relation to pension transfers make transfers even more unlikely to be suitable even if the critical yield is achievable.

Simon Collins is managing director of Resources Compliance



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