Updated: Nov 30, 2022
A recent FOS adjudication highlighted in FT Adviser reinforces the principle that advice regarding wrapper and the underlying investment needs to be given together and cannot be separated – even if the client insists on a particular investment. The ruling also raises some issues about the choice of investment index for compensation purposes.
Duty of care
In this case the adviser claimed that they advised on the transfer to a SIPP, but not on the underlying investment – that choice was made by the client. The adjudication found that under FCA rules the adviser had a clear duty of care around the client’s financial circumstances and the nature of the investments made, particularly given the high risk profile of the proposed investment compared to the relative safety of the existing funds. The adviser’s argument wasn’t helped by significant holes in the fact-find and suitability report.
Ombudsman Terry Connor also concluded that as the Cape Verde property investment was high risk, illiquid, and not subject to the usual protections that a standard investment would have had (such as the Financial Services Compensation Scheme) and that the FCA’s rules on Unregulated Investment Schemes (UCIS) and Non Mainstream Pooled Investments (NPMIs) should have applied.
At first glance this looks as if advisers should steer clear of all ‘insistent’ cases, but that’s not so. FCA has historically focused on a purely rational definition of ‘needs’ but is now, sensibly, beginning to recognise the validity of client ‘wants’. The problem for advisers – and regulators - is that ‘wants’ are subjective and more difficult to quantify than ‘needs’. But proper advice must take account of both needs and wants.
There are two keys to making this work – pragmatism and process. Pragmatism is all about recognising that there will be some clients whose needs and wants are either complex and/or high risk, but they are sophisticated enough to be able to cope. Conversely, clients who are vulnerable, or financially naive, need to be shielded from risks that they cannot reasonably comprehend. A hefty dose of common sense is required.
And that common sense needs to be backed up by process. A client may insist on a high-risk investment and if so the adviser needs to document the advice given. And that advice needs to be demonstrably in the client’s best interests, taking into account the totality of their circumstances and abilities. Proper process will provide flexibility to deal with individual circumstances, rather than the extremes of either ignoring the client’s wants – or completely acceding to them.
Index for compensation
The other issue raised by the adjudication was the use of the FTSE UK Private Investors Income Total Return Index for compensation purposes by FOS – a generous result for the client. This shouldn’t be adopted by the industry as a precedent, because each circumstance is different and there is no ‘right’ answer.
Our experience is that although any choice of index can be challenged because the interpretation of a ‘fair and reasonable outcome’ is inherently subjective, it is possible to work though the issues successfully - more pragmatism and process is required. The outer limits are clear: pay too little and you risk challenge, rework and loss of control – while paying too much provides an unjust and unnecessary windfall to the investor.
Inevitably PI insurers will want an index that provides low returns – and through their contractual policy wordings they carry a lot of clout. On the other hand regulators who conclude that a client has been badly treated will naturally tend towards a more generous choice. The important principle is that the client gets a level of compensation that represents the likely return that they could have expected if the advice had been appropriately based on their circumstances and objectives.
Early complaint handling
Early handling of a valid complaint is vital in providing room to negotiate at all. A client (and regulator) whose concerns are dealt with quickly and fairly is much more likely to accept a negotiated deal. We have often seen attempts to resist, based on a legalistic interpretation of the rules rather than a common sense understanding of regulatory principles, but as this adjudication demonstrates the total cost of the resistance and remedial actions can easily explode. As we have frequently pointed out in these articles, early pragmatic action on regulatory cases is far most cost effective.
It is our view that the advice element of this complaint represents the tip of the iceberg and reads across to the whole advice market. We expect that the FCA thematic reviews on Defined Benefit Pension Transfers and Retirement Outcomes (aka Suitability 2) are likely to highlight similar issues – that is, advisers following client instructions without fully discharging their responsibility to advise on the course action that is aligned with their best financial interests.
Clients do have the right to insist but advisers also have an obligation to provide comprehensive and appropriate advice. Successful navigation at reasonable cost requires healthy dollops of pragmatism backed up by good processes.