SIPPs and the insistent client – is there an easy solution for IFAs?

What is an “insistent client”?

At present, the Financial Conduct Authority (FCA) Handbook does not contain a definition for an “insistent client”, although the FCA (and its predecessor, the FSA), has published ample guidance over the years which gives some clues. A brief explanation based on current guidance is that an “insistent client” is a client who wants to take a different course of action from the one recommended by their adviser, and who wants their adviser to make that decision happen, even if it is against their advice.

That definition highlights the benefits for advisers of a client being classified as insistent. If the investment subsequently fails or underperforms, the adviser should be protected from blame because the client has acted contrary to their advice.

How can advisers ensure that a client is classified as insistent?

An adviser may consider a client to be insistent, but to be vindicated in the event of a complaint, they need to be sure that the FOS will agree. What steps can they take to ensure that?

Since the introduction of pension freedoms, the FCA has given guidance emphasising three key steps that it expects advisers to follow when dealing with an insistent client. These are:

• The adviser must provide advice which is suitable for that client and the advice must be clear.  Advice on pension transfers should follow the required process.
• The adviser should be clear about the risks of the alternative course of action proposed by the client.
• The adviser should be clear that the client’s proposed actions are against the adviser’s advice. 

If those steps are not followed, the FOS is unlikely to conclude that the client is an insistent client. Further, the FCA has said that they may expect to see more in cases involving pensions transfers. In some circumstances, they expect an adviser to get advice from a pensions transfer specialist, or start from the assumption that the transfer is unsuitable. The difficulty here is the ‘may’ – it is ultimately a matter of discretion, so it is impossible to be certain what is considered appropriate.

In any event, it will be noted that a signed insistent client form will not necessarily be sufficient – detailed, comprehensible advice is required. Beyond that, the position is not as clear as it could be. This year the FCA has published two consultation papers concerning insistent clients yet they give different guidance on what steps an adviser should take.

The first, concerning advising on pensions transfers, reiterates the three-step guidance given above. The other, a financial advice market review on insistent clients, suggests a five-stage process. It states that advisers should also (i) make a clear distinction between advice that is being acted against, and other advice, perhaps using different suitability reports; and (ii) keep a record of the process and communications to and from the client. Where possible, the client’s intention to proceed should be recorded in their own words: ideally there would be a tape recording of the interview.

What does the FOS say?

Insistent clients often invest in risky assets such as unregulated collective investment schemes (UCIS) and are reluctant to concede that such investments are unwise. Such investments may then underperform, or even be completely lost, leaving an investor looking for a scapegoat, who is often their adviser. The FOS’s attitude is therefore important.

According to recent statistics unveiled by the FOS, at present there isn’t a problem per se with insistent clients. For 2015/16, 24 complaints concerning insistent clients had been received, and for 2016/17, there were nine cases. It is not feasible to draw any meaningful conclusions from such a limited pool of data. The issue has, however, appeared in older cases, and also crops up as a tangential point in some decisions.

The FOS’s approach has been controversial at times. In one well-known decision, the FOS found against an adviser despite a signed insistent client form. The client, who was illiterate, wanted to access tax free cash via a pensions transfer in order to invest in solar panels. She was firmly advised not to proceed, but insisted and so the transaction went ahead. The FOS found that she had been given insufficient information in a format which she understood, and the presence of a signed form did not save the adviser.

On the other hand, the FOS has been known to decide that investors are insistent clients even when there was no signed form to that effect. Since the adviser had made the position clear in a suitability letter, they were treated as an insistent client. As ever with such things, form is less important than substance. According to the lead ombudsman, the FOS’s position is that, if the adviser has done what they should have done in respect of an insistent client, the adviser has nothing to fear.

Is there trouble ahead?

A combination of factors suggests yes.

First, there is plenty of negative press around pension freedoms at present especially involving “hard luck” stories where people have lost their entire pension holdings. That will encourage clients to bring claims.

Second, there are the ongoing FCA consultations, and their evolving approach to insistent clients. There are also the uncertainties, highlighted above, around the actions required in respect of pensions transfers. On average, it takes approximately 10 years from the point of advice in relation to a pension for a complaint to be made. Therefore we can likely expect to see many more claims and complaints from insistent clients, and for some time to come.