Hardly a day goes by without a debate on whether or not advisers should deal with insistent clients.
Those in the “shouldn’t” camp, mainly hide behind two key points:
- The client’s best interest rule
- The fact there is nothing in the FCA Handbook which deals with insistent clients
When you take a closer look however, both of the above are red herrings. I will explain why.
The starting point is the high level principles set out by the FCA, including that: “A firm must pay due regard to the interests of its customers and treat them fairly.”
The client’s best interests rule states:
“A firm must act honestly, fairly and professionally in accordance with the best interests of its client. This rule applies in relation to designated investment business carried on: a) for a retail client; and b) in relation to Mifid or equivalent third country business, for any other client.”
It goes on to say:
“The obligation of a firm to act honestly, fairly and professionally in accordance with the best interests of its clients includes both the client’s best interests rule and the duties under the principles of integrity, skill, care and diligence and customers’ interests.”
So long as the customer is placed in an informed position and advisers put customers’ interests ahead of their own, there is actually nothing from a regulatory perspective that prevents a firm dealing with insistent clients.
The argument there is nothing in the FCA Handbook that deals with this scenario also cuts both ways. While there is nothing saying explicitly that you can deal with insistent clients, it also does not say you cannot. Surely, if the regulator wanted to ban advisers from dealing with insistent clients then they would use the rulebook to do so?
In February 2016, the FCA expressly addressed how to deal with insistent clients in three key steps, in its guidance notes on pension reforms and insistent clients.
These are as follows:
- You must provide advice that is suitable for the individual client, and this advice must be clear to the client. This is the normal advice process
- You should be clear with the client what the risks of the alternative course of action are. Where the advice includes a pension transfer, conversion or opt-out, there may be additional requirements such as ensuring the advice is provided by or checked by a pension transfer specialist, comparing the defined benefit scheme with the defined contribution scheme and starting by assuming the transfer is not suitable
- It should be clear to the client that their actions are against your advice
In these guidance notes, the regulator also states: “Although there are no rules specifically in relation to insistent clients, you must follow the normal advice rules first.”
The question therefore is not whether you can or cannot deal with insistent clients as the answer is clearly that you can. The question is whether or not firms choose to do so, based on their risk appetite and whether they can obtain comfort on managing the risk exposure appropriately.
At Tenet, we have taken the commercial decision that each case should be considered on its own merits and may well be influenced by how well an adviser knows the client and the degree of departure from the recommended advice. The solution may still be suitable but sub-optimal.
To reduce Tenet’s and our firms’ risk exposure, we have elected to pre-assess all insistent client business (about 5 per cent of DB transfers) and we have also taken the commercial decision not to deal with insistent clients where the client cannot demonstrate they can cover their minimum expenditure requirements in retirement. Other firms will set their own criteria.
In this industry, very few things are black and white and this is no different. But let’s stop hiding behind the rulebook and have an honest debate on the real issues and concerns advisers have on dealing with insistent clients.
In reality, this is actually all about how future claims will be handled by the Financial Ombudsman Service.
Mike O’Brien is group regulatory director at Tenet