What insistent clients mean for your PI cover

In its Financial Advice Market Review: Implementation Part 2 and Insistent Clients consultation, the Financial Conduct Authority (FCA) acknowledged there were instances where a client has received a personal recommendation but they may choose to take a different action to the one that was recommended.

However, the consultation paper also reiterated: "It is essential that clients in this position have had the consequences fully explained so they understand the implications of proceeding against the recommendation."

While the full policy statement on this consultation is due out in December, according to the FCA website, the regulator has set out its principles for dealing with a request made by an insistent client.

The consultation document, section 6.6, states: 

"When proceeding with a request for an insistent client it is important that the firm that has given the personal recommendation makes it clear:

(a) what element of its advice is being acted against.

(b) that any further advice given is subsequent to the specific action requested by the insistent client."

The FCA document also states that the guidance will "make it clear to advisers that where they facilitate a request that conflicts with the personal recommendation they should ensure" the following:

• The original advice given complies with the requirements for giving a personal recommendation.
• They have communicated clearly what their recommendation is and the reasons for their recommendation. 
• They have clearly communicated the risks of the alternative course of action proposed by the client and why they have not recommended it. 
• There is a clear distinction between the advice that is being acted against and any subsequent or concurrent advice. This might be achieved through distinct suitability reports.
• They keep a record of the process followed and the communication to and from the client that makes it clear that the action is against the personal recommendation at the client’s request. Best practice would be for a record of the client’s intention to proceed against advice to be in the client’s own words.

Future concerns

But even with regulatory guidance, some participants are concerned there could be an issue further down the line.

Martin Tilley, director of technical services for Dentons Pensions Management, explains: “In the past, for example, people have been ‘sold’ the idea of overseas, off-plan hotel rooms or other esoteric investments by non-regulated investment promoters, which could only be accessed by a self-invested personal pension (Sipp).

“These clients used to approach advisers to ask them to facilitate the establishment and transfer of their pensions into the new Sipp.”

He says while some advisers were pressured into doing this, they had no involvement in the subsequent investment.

To go against the advice received is risky business for any individual, and so a layer of additional protection needs to be considered.Sankhar Mahalingham

However, fast-forward to when the investment fails, and one finds the “client has taken the case to the ombudsman, who finds the adviser should have taken into account what the Sipp was being created for, and found against the adviser despite their non-involvement with the investment”.

Mr Tilley concludes: “As a result, it is understandable advisers would choose not to accept an insistent client for fear of retrospective reprisals where clients’ actions are subsequently taken, which are outside of the adviser’s control.”

But not all advisers can simply say no; nor can they risk having a knock at their door 10 or 15 years down the line.

Keith Richards, chief executive of the Personal Finance Society, says even if one follows all the processes to a ‘t’, it does not provide any personal guarantees against that knock at the door.

He says: “There is no certainty with regard to the treatment [an adviser] would get in the future from the ombudsman, the Financial Services Compensation Scheme and claims management companies.

“Advisers who facilitate insistent client transactions expose their client, themselves and the sector to a high risk of vulnerability to future complaints.”

Insurance

Professional Indemnity (PI) mostly covers advisers in the event of future regulatory action of this kind, although not in all circumstances.

But with the pension freedoms opening up a wider range of potential issues, PI providers have been covering the potential for claims over transfer or drawdown advice post-pension freedoms in their policies.

However, some experts have claimed these concerns have pushed up premiums among the 10 or so PI insurers operating in the UK market. 

This is to be expected, however. A spokesman for the Personal Investment Management and Financial Advice (Pimfa) association comments: “PI insurers want to understand the likely volume, nature and value of any complaints leading to client remediation.

“Where a firm otherwise has a good track record of managing claims volumes and the ratio and values of settlement, it helps PI insurers assess the appropriate risk premium.

“A high volume or a sudden increase in the ratio of insistent clients might be an indicator that the firm is transacting business that might include higher-risk investments or more complex business.”

Therefore, while there is a risk of premiums heading northwards, this risk should only be taken on board by companies which do not have proper procedures already in place to support insistent clients.

The Pimfa spokesman adds: “It is unlikely PI insurers would refuse to cover or rate firms purely for carrying out a limited amount of insistent client business.

“However, a poor complaint and claims record arising from insistent client business might affect the extent of cover and premiums.”

Future PI

For Mr Richards, the problem goes far deeper than a case-by-case assessment of individual firms’ risks by PI insurers.

He believes there could be a widescale issue that will affect not just the firms with poor processes, but the whole advice industry.

“A significant risk lies with PI cover, which is annually renewable. If at a future point, ‘compensation fever’ starts to emerge in respect of DB transfers, insurers would have the opportunity to reduce their exposure to the risk by hiking excesses, or removing cover completely.”

Mr Richards therefore warns: “This would leave firms to pick up the entire cost of compensation, which could see the smaller firms fail financially as a result, leaving the rest of the adviser community to pick up the cost.”

Protecting the client

The Pimfa spokesman highlights that there may be “unscruplulous firms” that use insistent client procedures to help clients get higher-risk investments beyond their capacity for loss.

In this case, both regulatory supervisors and PI insurers should “remain alert” to this possibility.

In addition to PI cover for their own business, the regulator should be looking to create a ‘protection’ for insistent clients to help make it unattractive for them to financially harm themselves.

Sankar Mahalingham, head of defined benefit growth for Xafinity, comments: “The regulator is always likely to have a certain level of concern for insistent clients, and rightly so.

“To go against the advice received is risky business for any individual, and so a layer of additional protection needs to be considered.”

Simoney Kyriakou is content plus editor for FTAdviser