The U.K. FCA’s proposed insistent customer guidance in CP 17/28 | Wolters Kluwer Financial Services
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  • The U.K. FCA’s proposed insistent customer guidance in CP 17/28

    By Adam Samuel

    Published November 08, 2017

    The U.K. FCA’s decision to produce guidance on insistent customers gives compliance geeks from the late 1990s nightmares. Anyone who worked on the pension review recalls the legion of cases which were supposed to have resulted from advice rejected by the customer. These sales were never compliant because it was impossible to show that the adviser had disclosed all the risks of the transactions when he typically did not know anything about the benefits being given up. The conduct of business rule books have stayed largely silent on insistent customers since before 2001. The one exception, MCOB originally suggested that it would be contrary to Principle 6 or the clients’ best interests rule. COBS 19 which covers pension transfers, opt-outs and non-joiners requires advice not to do the transaction to be supplied.

    The Financial Advice Market Review perhaps unwisely has led the FCA to attempt some guidance in this area. Much, though, is fairly uncontroversial.

    Defining terms 

    Chapter 6 of CP 17/28 defines an insistent customer as someone “who has received a personal recommendation and chooses to do something other than follow the adviser’s personal recommendation.” The draft guidelines, which will be COBS 9.5A.2G if adopted, are slightly different, requiring three elements: 1) the firm’s personal recommendation, 2) the client’s decision to enter into a transaction that is different from that recommended and 3) the client’s wish to have the firm “facilitate” the transaction.

    It is probably unhelpful that the regulator has not distinguished between situations where the customers proposes to do something unsuitable from those where they have merely rejected the advice given. There is a huge qualitative difference between a customer who for sentimental reasons wishes to pay slightly more for a product or fund that is suitable but not what the adviser thinks is ideal and the client who wants to do a transfer from a top-quality defined benefit pension scheme.

    The ethical problem 

    The problem is more profound than it appears. It is not possible to see how transacting business that is affirmatively unsuitable can be ethical or consistent with the regulator’s own “best interests” rule, COBS 2.1.1R which says: “A firm must act honestly, fairly and professionally in accordance with the best interests of its client”. Doing a transfer to a SIPP with slightly higher charges, for reasons of the customer’s personal preference, than the one recommended would probably be consistent with COBS 2.1.1R. Arranging a transfer from a defined benefit scheme whose benefits are likely to outperform the new pension would not be COBS 2 compliant.

    Disclosure 

    In any event, the proposed COBS 9.5A.3G suggests that the firm proceeding with the transaction would have to communicate in a clear, fair and not misleading way having regard to the client’s information needs so that the customer is able to understand the relevant disclosures. Whether it is necessary to repeat the whole of Principle 7 is open to question. It creates verbal clutter. In any event, the advising firm must make clear that the transaction will not “be in accordance with the firm’s personal recommendation”, why, the risks of the transaction and why the firm did not recommend it. Annoyingly, the regulator has failed to reproduce its own commentary in the guidance. Chapter 6 of CP 17/28 insists that the firm make clear “what element of its advice is being acted against”. This is probably included in COBS 9.5A.3G(2). However, the regulator could usefully have said this.

    Chapter 6 again is slightly clearer here. Firms must communicate clearly what their recommendation is and the reasons for it and ensure that their recommendation is compliant. Either way, in a clear reflection of the old pension review guidance, both commentary guidance agrees that the firm must have clearly communicated the risks of what the customer wants to do and why they have not recommended it. This is incredibly difficult to do in a Principle 7 compliant way to a customer who has rejected the advice given.

    Recommendations after or alongside the insistent transaction 

    A major danger to the firm concerns personal recommendations made in relation to transactions proposed by the customer. The business must make clear that any later advice is “subsequent to the specific action requested by the insistent client” (Chapter 6) or “distinct from, but does not affect the conclusions of the initial personal recommendation” (proposed COBS 9.5A.4G).

    This may involve writing a second suitability report dealing not with the firm’s recommendations but the customer’s wishes. The regulator suggests a further suitability report if the customer is going to act on other advice.

    This, though, is the really difficult part of insistent customer business. In theory, one can split the rejected recommendation from the subsequent advice. It certainly can be done where the client’s alternative is suitable. However, there is always a risk that where a firm makes investment recommendations following on from an insistent transaction that the recommendations will give the seal of approval to an unreasonable underlying transaction.

    Ethically and professionally, it is much safer to hand the customer over in this type of situation to another adviser to do the transaction on an execution-only or non-advised basis. This replaces the advisory relationship with one more akin to an order-taker. Then, that adviser or channel within the firm can then offer advice on what to do next. This view may seem unnecessarily negative. It is based on painful experience of the pensions review when advisers put through apparently insistent customer cases in order to obtain the review from the transactions created by the transfer concerned. In many cases, the adviser had advised the whole package. This re-emerged as a serious concern with the 2014 FCA Thematic Review into enhance transfers. This type of hand-over to an execution-only channel is at least consistent with the firm’s ethical responsibilities and reduces the risk of a later allegation that advice was given to do the unsuitable transaction.

    Record-keeping

    The FCA rightly requires a record of the process and the various communications between the firm and the client to make it clear that the customer is proceeding against the firm’s advice. The guidance suggests an acknowledgement from the client that the “transaction is not in accordance with the firm’s personal recommendation” and “is being carried out at the” customer’s request. Chapter 6 suggests that best practice would be for the record of the client’s decision to proceed in this way to be “in the client’s own words”. The guidance recommends this to be the case, “where possible”. This is reminiscent of the pensions and FSAVC Review’s requirement of a corroborating letter in (according to the latter review’s guidance) the customer’s own handwriting. Writing, though, is not needed by the guidance which gives rise to concerns about firm’s providing written texts that sound like their customers’.

    Smart ethical behaviour 

    The smart thing to do with insistent customers who want to do unsuitable transactions is to lose them. Sensible and ethical advisers refuse to put deals through the books that they think are not in their clients’ interests. Often this type of refusal creates respect and client loyalty, particularly when as it usual does, it costs the adviser a fee. The FCA guidance ought to explain this and how the regulator can reconcile its apparent desire to give confidence to advisers when dealing with insistent customers with its own “client’s best interests” rule and firms’ and its own ethical requirements.

    About the author: Adam Samuel is a lawyer and compliance consultant and the author of the only major book on financial services complaint handling. He combines diploma level qualifications with the CII, a complete set of certificate level CII exams, the CISI Diploma in Compliance with merit with his background as a barrister and attorney. Formerly the second PIA Ombudsman and an IOB Ombudsman's Assistant, Adam sits on the Ethics Committee of the Institute of Financial Planning and sat for seven years on the Practice and Standards Committee of the Chartered Institute of Arbitrators of which he was also the chairman of the Arbitration Sub-Committee for four and a member for ten. Adam is a regular contributor to Wolters Kluwer Financial Services’ Compliance Resource Network.

     

     



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