What does the FCA say about insistent clients?

There are a number of sources of regulatory information for advisers seeking guidance on these issues.

For instance, the Financial Conduct Authority sets out its position on insistent clients in the context of the 2015 pension reforms, in a three-step process. It also provides general, additional guidance for firms with insistent clients in its conduct of business obligations (COBS).

Furthermore, the regulator’s rules for pension transfer advice, updated in October last year, also give direction, as part of its work on improving the quality of pension transfer advice.

The first of the FCA’s three steps will be familiar to advisers, as it follows the normal advice process, that they must provide advice suitable for the individual client and that this must be clear to the client.

With all due respect to the FCA’s three steps, it all comes down to the adviser’s relationship with the client.Frank Morton

Step two emphasises that advisers must make sure that the client is clear about the risks of the course of action they choose.

The FCA also highlights the additional requirements to be undertaken if the advice includes a pension transfer, conversion or opt-out – for instance, ensuring the advice is given by or checked over by a pension transfer specialist; comparing the DB scheme with the DC scheme; and starting from the assumption that the transfer is not suitable.

Thirdly, the FCA says it should be clear to an insistent client that their actions contradict the adviser’s advice.

The regulator also flags up the importance of clearly distinguishing a client’s investment objectives from requests or preferences, before making a recommendation – giving the example that accessing cash from a pension is not an objective.

The FCA highlights some areas of concern from cases that have come their way, that might be useful for advisers to bear in mind, including inadequate assessment of other options that would be a good fit for the client’s objectives; insufficiently clear advice and inadequate explanation of the risks of the client’s preferred course of action.

It also cautions against ‘papering exercises’ where the adviser processes the case on an insistent client basis, when this does not reflect the circumstances. 

The buck stops here

In its additional guidance for firms with insistent clients, the FCA further emphasises that where a firm goes ahead with a transaction for an insistent client which deviates from the firm’s recommendation, it should communicate with them in a way that is clear, fair and not misleading.

The points to get across are that the firm has not recommended the transaction; the reasons why it diverges from their advice; the risks of the client’s proposed transaction; and the reasons why the firm did not recommend that course of action.

That is not enough, though, given that clients may not be accustomed to dealing with complex financial information.

The guidance places a responsibility on the firm, however, to ensure the process is a two-way street.

The regulator suggests that firms should obtain an acknowledgement from the client that the transaction is not in accordance with the firm’s recommendation and that it is being carried out at the request of the client.

This needs to be in the client’s own words, to make it clear that the client is not just signing another piece of documentation that may be indistinguishable from the rest.

Our client onboarding process is extensive; it typically takes us a year to engage someone.David Hearne

Advisers must then ensure they keep a record of the advice and process followed, including their communications with the client, and the acknowledgement from the client that they are aware that the transaction is contrary to the firm’s recommendation and is being progressed at the client’s request.

There is further back-up.

In its pension transfer rules published in October last year, where advisers are now required to produce a suitability report, regardless of whether they are transferring or sticking with the scheme they are in, the FCA says that where a client is advised not to transfer, the suitability report provides them with “a lasting record of why remaining in a safeguarded benefits scheme is the most suitable outcome for them”.

Know your client inside out

While the FCA’s guidance, rules and three-step process provide a clear steer for advisers, there is much more involved in managing an insistent client, as Frank Morton, a director at Phil Anderson Financial Services, in Aberdeen points out: “With all due respect to the FCA’s three steps, it all comes down to the adviser’s relationship with the client.

“These situations go beyond the normal ‘know your client’ rule. You have to take your time and remember that they are in completely foreign territory.”

Mr Morton also reports that the firm works to its additional own steps for managing insistent clients, which include stress-testing the client’s understanding, reaffirming the adviser’s position; asking if there is anything missing from the conversation, that they might not have mentioned; and showing empathy.

Other advisers are building in their own checks and balances too – in some cases to filter them out from the start, as David Hearne, director and wealth management adviser at Satis Asset Management, explains: “Our client onboarding process is extensive; it typically takes us a year to engage someone – we work with people who want to delegate management of their financial affairs."

He adds: “We get to know them first over time, to ensure the relationship is going to be mutually beneficial. We’d get a feel for whether they might be insistent clients in these initial meetings.”

Fiona Nicolson is a freelance journalist