Dealing with insistent clients

The issue has come to the fore following the introduction of the pensions freedoms, which has led to some clients either wanting to cash in their entire pension pot or trade in a defined benefit (DB) scheme for a defined contribution (DC) equivalent in order to take advantage of the new regime. But, while insistent clients have prompted much industry debate, some advisers think the seriousness of the issue has been exaggerated.

“Most clients do not have a thorough knowledge of personal finance,” says Alan Solomons, a financial planner at London-based Alpha Investments. “They need educating and to be made aware of what other options there are and the impact of what they want to do. Sometimes what they want to do is quite sensible, sometimes not.”

He further explains that it is first necessary to understand where the client is coming from and do a factfind. “I am not going to sign a piece of paper for a fee just because they are insistent, without doing the necessary work to prepare a suitability report and express my opinion and give my advice.”

Issues surrounding ways to deal with insistent clients have been one of the top concerns for the FCA and have been addressed in several speeches by Rory Percival, the regulator’s technical specialist. However, the formal rule book does not offer any guidance on how to deal with them.

The regulator defines insistent clients as those who choose to take a different course of action from the one recommended by the adviser, but who want the adviser to facilitate the transaction.

“I’ve had to deal with a large number of these over the past 12 months,” says Kusal Ariyawansa, a chartered financial planner at Appleton Gerrard in Manchester. “In these situations it always helps to use the medical analogy: doctors do not give what the patients ask for, especially in complex situations, without undertaking a comprehensive analysis. Once people hear and understand, they usually relax and provide all necessary information.”

He further explains that insistence can be due to a number of reasons – such as need or greed. “In the case of the latter, a decline to act is easier.”

Some advisers are upfront about these cases. “I give professional advice; if someone doesn’t want to follow my advice I will not take them on as a client,” says Susan Hill, a St Albans-based chartered financial planner, adding that if something is not in client’s best interest then it is best to not do it.

While the FCA does not formally mention anything about insistent clients in its handbook, it outlines three steps for advisers in dealing with insistent clients in a factsheet in June 2015. The first step is for advisers to provide their advice in a concise manner, emphasising the need to ensure the client’s understanding of the recommendations.

The second step suggests that it should be clear to the client that their actions are against your advice. And finally, advisers should explain to the client what the risks of the alternative course of action are. If the client does decide to go ahead, advisers must clarify that this was not their recommendation.

The FCA further states that, while there are no rules specifically in relation to insistent clients, an adviser must follow the normal advice rules, such as obtaining the necessary information about the client and their investment objectives, financial situation and knowledge and experience in order to make a proper recommendation.

“Both the FCA and the Financial Ombudsman Service (Fos) have been clear about the process,” says Jane Hodges, a chartered financial planner at London-based Alexander House Financial Services. “Some advisers believe they should get a ‘free pass’ and somehow the FCA/Fos will not make them accountable for giving advice or allowing insistent customers when it comes to pension freedoms and transfers. I don’t think they are listening to what they are being told.”

She suggests that many advisers have in the past tried to use insistent client rules to circumnavigate their advice liabilities and have instigated and influenced this action. “My tip – just record the meetings, it is easy to see who drove the process and instigated the insistence,” she says.

Not all advisers think the FCA is doing its job in countering this. Christopher Foster, a chartered financial planner at Pennines Independent Financial Advisers in Oldham says, “I have encountered many obvious ‘rip-offs’ over the years, all using the insistent client route. In some cases there has been sufficient evidence for me to report this to the FCA. In every case the FCA seemed to be very slow to act.”

The regulator’s current thinking is unclear. A member of the media team says, “We have asked about insistent clients in our recent consultation on pension rules – it is too early at this stage to say what the result of the consultation will be.”

This consultation paper, published in October 2015, invited advisers’ views on rules around insistent clients. The paper aims to gather recommendations for greater clarity around the issue and also find out the extent to which professional indemnity (PI) insurance is a barrier to undertaking insistent client transactions. The consultation came to an end in January and the FCA will publish its findings in Q2 of 2016.

“Both the FCA and Fos have made it clear that as long as the process outlined by the FCA is followed to the spirit, not just to the letter, then advisers and therefore PI Insurers should have nothing to fear,” says Ms Hodges. “If the industry worked together to address the main principles of proactive advice so everyone understood what good advice looked like, this would help far more as we would be advising our customers with confidence again and not hiding behind insistence.”

Liability

However, PI is a big concern for some in the adviser community. “I doubt advisers have concerns about helping clients even if the client chooses to disagree with the advice being given,” says Benjamin Sear of Martin-Redman Partners in Suffolk. But the work could be uninsurable, and although PI is a concern, so too is reputational damage from upheld complaints by the ombudsman.

The implications for PI are most significant for advisers since insurers reserve the right to withdraw cover for advisers dealing with insistent client at renewal.

But according to Mr Solomons there are two things to think about. First, it is the client’s money so they can do what they like with it. Then there is the matter of how damaging it would be for the adviser’s PI policy. There is increasing anecdotal evidence of PI insurers threatening to withdraw cover for advisers dealing with clients wanting to trade in a DB to a DC scheme.

“I talk to technical support and my PI insurers,” Mr Solomons says. “At that point I either do it as execution-only with a strongly worded letter saying I think this is inadvisable and set out why and get them to sign that they have read and understood it. I also record all phone calls. Or I tell them, ‘Sorry, I am not prepared to action what you want because it is not in your best interests’. Each case has to be considered on its merits, or lack of them, and the amounts of money involved.”

While many claim that the FCA is not doing enough to help advisers on this issue, the regulator clearly defines the practice of good advice. Mr Percival has also said at various events that if advisers follow the three-step approach to giving advice, there will not be a problem with insistent clients. The latest FCA consultation paper asks for recommendations from advisers on how to deal with this issue. It is now up to advisers to contribute.