You’d have thought that poor advice was becoming a rarity by now wouldn’t you? But no, it still seems to be alive and kicking judging by the number of individuals being cited as being ‘incompetent’ by the FCA.
Just last week, the regulator published yet another final notice which made startling reading. This time 422 individuals had been advised to transfer their DB pensions and were it not for the FSCS compensation limit of £85,000 (the firm had, of course, ceased trading and the bill will ultimately fall on those firms still in business), the redress payable would have been £6.18 million!
The financial penalty that the FCA was due to impose on the individual would have been £1,484,629, but in lieu of the actual penalty he has been instructed to pay £200,000 to the FSCS. But if that was the penalty, how much was generated from those clients in the first place?
In the summary of reasons for its actions the FCA stated that the adviser had:
Made recommendations to customers on the flawed assumption that a pension transfer to meet the customers’ stated objectives was in their best interest, and to recommend the product the customer wanted. And gave undue weight to customers’ stated desire to transfer their pension and to meet various identified objectives, even where the identified objectives were not realistic and the pension transfer would be to their detriment.
Lots of issues here, but basically the adviser appeared to be taking orders and because the client said that they wanted to transfer, that was OK. Unrealistic objectives too. We’ve seen lots of DB transfer cases where the client wants an income in retirement that is higher than when they were working. For obvious reasons this is rarely sustainable, so surely it’s the adviser’s responsibility to provide a reality check isn’t it? Seems that they didn’t in this instance.
Did it matter whether transfer was in the clients’ best interests? Well, obviously not. In reality, the adviser’s own interests seemed to take priority over those of 422 clients.
What do the rules say?
There’s a rule in the FCA Handbook that is all too often overlooked, but may be one of the most important of all – the client’s best interests rule.
It’s just a one liner, but COBS 2.1.1R states that:
A firm must act honestly, fairly and professionally in accordance with the best interests of its client.
Acting in accordance with someone’s best interests seems relatively straightforward doesn’t it?
Most sensible people would suggest to someone who had just downed eight pints and a few whisky chasers that driving home was probably not in their best interests. Or that gambling their life savings on a 250/1 shot in the 3.30 at Haydock Park was similarly unwise, yet despite years of regulation (yes, it is 23 years since the first incarnation of FSMA), numerous thematic reviews and scores of final notices we still see the best interests of clients seemingly coming some way down the pecking order, and cases we’ve seen in recent months provide evidence of this.
In one case, the client was advised to move their existing GPP valued at almost £300,000, with 90+ funds available and applying a total cost of less than 0.2% per annum to a new arrangement. The client was allegedly ‘disappointed’ that the only communication they received from the product provider was an annual statement. Isn’t an annual statement what most people with a PP receive? On the flip side, you’d be amazed at how many times we see files where pensions or investments are switched simply because clients didn’t want the ‘burden of the paperwork’.
This client was also apparently disappointed with the performance of the funds and wanted them to be “better managed” (any guesses where this is heading?). This should be a straightforward fund switch recommendation then. Err, nope.
It may come as little surprise that the firm operated a CIP and that the CIP was where the money moved to, but what came as a much bigger surprise was that the firm charged the client nearly £6,000 for doing so (2%) and that the ongoing advice charge which now applied was 0.75% (about £2,200 per annum). So, year one costs of over £8,000 for a move to a massively more expensive arrangement. Total costs were now circa 1.9% pa, more than eight times higher than the existing arrangement, which incidentally, the client and their employer still contributed to, and the adviser had left £1,000 in so that contributions could continue. If the new arrangement was so good (it wasn’t) why wasn’t everything switched?
The suitability report stated that the adviser believed that this course of action was in the client’s “best interests”. Figure that one out if you can.
Sadly, this client wasn’t alone. Another client was advised by the same firm to do exactly the same thing. For the same reasons.
You just can’t make this stuff up.
Another client with a substantial sum to invest (just shy of £1 million) following the sale of a property, was recommended to place the funds in a GIA, so that the firm could, “move funds to an ISA each year to use their ISA allowance”. That’ll take a while then!
With the significantly reduced annual CGT exemption there could be some potential tax issues couldn’t there? Oops!
An investment bond was discounted on the grounds that the client would “lose investment control”. Really?
A DGT was ruled out (the client had an IHT liability) because the client “wouldn’t get a discount”. The client was 80 and in reasonable health.
It transpired that the firm operated a CIP and this wasn’t available via an investment bond, but it was via a GIA/ISA of course, so you know the result.
Client’s best interests? Erm, no.
Horizon heads up.
The FCA is due to publish its findings from its thematic review of Retirement Income Advice imminently, any guesses whether client’s best interests will be at the forefront of them? Or will it be more of what we’re seeing here?
Fortunately, we deal with firms that can robustly evidence that they’re acting in their clients’ best interests, but there are others out there that clearly don’t, and as we’ve seen, the files are there to prove it. You may be able to read about them in future FCA final notices.