Defining Broken Transfers: How should the advice sector handle insistent clients?

Hannah Godfrey writes...

If all advisers avoid insistent transfer clients and deny them what they want, then there goes a theory that eventually their fate will end up in the hands of those more unscrupulous. So, how does the advice sector as a whole deal with these determined clients?

Insistent clients are big business in the world of defined benefit (DB) transfer advice. So big, in fact, some 9,534 insistent clients were transferred out of DB schemes between April 2015 and September 2018. That data from the Financial Conduct Authority (FCA) means insistent clients were involved in about one-in-eight (13%) of all those who transferred. What is more, these insistent client cases came from 620 firms – or 25% of all advice businesses that have advised on DB transfers since pension freedoms.

That said, anecdotal evidence suggests facilitating insistent client transfers is becoming less and less fashionable. Indeed, a quick plea for information from RP sister title Professional Adviser asked readers if they had facilitated an insistent client transfer. The question prompted such responses as “What? F NO” and “Nope. Wouldn’t. Why run around saying: ‘hey, pay me for advice’, and then I might let you pay me to do the opposite to what I advised? It makes no sense.”

But, if all advisers avoid insistent transfer clients and deny them what they want, there goes a theory that eventually their fate will end up in the hands of those more unscrupulous and less honest. So, how does the advice sector as a whole deal with these determined clients? Or, perhaps more directly, is there a responsibility of professional advisers to service insistent clients?

Well, despite the hard protestations we received, Professional Adviser obtained figures from the FCA that showed between pension freedoms in April 2015 and September 2018, the number of insistent clients rose steadily. Indeed, in the data we have access to, the number of insistent transfers peaked at 3,541 in the 12 months between October 2017 and September 2018.

Unfortunately, the regulator does not hold statistics for the 12 months between October 2018 and the present day, but one may assume that figure has dropped as the professional indemnity (PI) market has tightened up and the regulator has spent time closely looking at the DB transfer sector.

With the regulator’s focus on the sector hotting up and it becoming more and more challenging to obtain PI cover in the DB space, most will surely consider it the safe option to avoid carrying out any insistent transfers. However, one could also argue advisers refusing to facilitate insistent client DB transfers is going against pension freedoms, which politicians said would enable savers to do whatever they want with their pensions, even – as goes the famous line from former pensions minister Steve Webb – buy a Lamborghini.

If advisers are not prepared to facilitate insistent clients, are they unreasonably putting a pin in pension freedom? And if it is considered only right that insistent clients get to make use of pension freedom as well, how are advisers to handle that? As Quilter pension expert Ian Brown puts it, advisers are stuck between a rock and a hard place.

He explains: “The recent figures from the FCA around DB pensions highlighted that the population and value of insistent clients is bigger than those who transferred out of the British Steel Pension Scheme (BSPS). And not by small numbers – there were 9,500 insistent clients compared to 8,000 transferred out of BSPS. And it’s not small sums either, with £3.3bn worth of pensions for insistent clients and £2.8bn for BSPS.

“Advisers are stuck between a rock and a hard place when it comes to these clients. While the FCA has provided advisers with a process to follow when it comes to insistent clients this does not fully protect the adviser against complaints. Recent judgments from the Financial Ombudsman (FOS) have ordered advice firms to pay compensation to insistent clients. Meanwhile, claims management companies are on the hunt for the next big thing and insistent clients raise a flag worth pursuing.”

The FCA and insurer’s takes

According to the FCA handbook, advisers are allowed to facilitate insistent client transfers. The regulator describes an insistent client as: “A client that has been given a personal recommendation by a firm and then decides to enter into a transaction which is different from that recommended by the firm in that personal recommendation, which the client wants the firm to facilitate.”

The handbook says that, if a firm proceeds to execute a transaction for an insistent client, the firm should communicate to the insistent client in a way that is fair, clear and not misleading. It also says the client needs to understand that the firm has not recommended the transaction, the reasons why, and the risks of the transaction.

The firm should then obtain an acknowledgment from the client the transaction is not in line with the firm’s personal recommendation, and that it is being carried out at the request of the client. And, where possible, such acknowledgment should be in the client’s own words.

Firms that have dealt with an insistent client should retain a record of the advice and transaction process followed, the handbook concludes, including communications with the client and the acknowledgement from the client mentioned earlier.

And it would appear PI policies reflect that of the FCA. Liberty Speciality Markets senior underwriter Paul Freeman tells PA that in order for the insurer to consider providing cover for an insistent client DB transfer, a firm must be able to demonstrate the client understood both the reasons why the transfer was not in their best interests. They should also be able to demonstrate the likely value of the benefits they are relinquishing, as well as exactly why the client wished to continue with the transfer despite the professional advice they received.

“We would expect this clarification to be in the form of a signed letter from the client, followed by written confirmation from the adviser that the client wishes to proceed on that basis,” the underwriter continues. “The confirmation needs to highlight that the client is taking this action against the advice given.

“We would also expect to see a signed letter from the client and these letters should not be a pro-forma insistent client letter provided to the client for their signature from the adviser. We would also recommend that the adviser keeps a digital recorded copy of the conversation with the client confirming the client’s understanding of their actions, which should then be followed up in writing by the adviser.”

‘I’ve gained £80,000 in four years’

Despite there being a process to follow, advisers still appear reluctant to engage with insistent clients seeking DB advice. While advisers have their reservations over insistent clients, there is no doubt there is a large market of individuals who believe they have the right to do what they want with their money.

And, to that tune, PA spoke with Andy Rayner, who left his DB scheme and describes himself as insistent. Rayner worked for Norwich Union – now Aviva – some 10 years ago and wanted to access his DB pension so he could retire early, which he claims he could not have done without transferring out of the scheme. He had first been alerted to the idea of transferring out of his scheme and into a self-invested personal pension (SIPP) by a former colleague.

“In terms of simple maths, [transferring] seemed quite appealing in terms of getting that money now and having time to invest it,” says Rayner, who has since started working as a civil servant. “So I got in touch with an adviser to speak about it, and to potentially arrange the transfer. He looked into it for me and did some number-crunching, as well as all the normal due diligence around circumstances and what advice he could give. He came back and said that, having crunched the numbers, he couldn’t advise me to go ahead with it.”

Undeterred, Rayner told the adviser he wanted to retire early and enjoy the fund while he is still alive with his family and wife, who is 20 years his junior. Rayner says he had no debt, nor a mortgage, and a transfer was a risk he was willing to take.

His adviser took time to consider whether he could go on and oversee the transaction. He eventually decided he would allow Rayner to transfer as an insistent client, providing he was willing to write down his reasons for pursuing a transfer and that he acknowledged it was against the adviser’s advice. Also, the adviser told him both he and his wife had to sign the document.

Rayner no longer has a relationship with his adviser because he did not feel he needed further advice after the transfer. And, when asked whether advisers should advise insistent clients, he gave a resounding “yes”.

“Without [the transfer] I wouldn’t be able to entertain the idea of retiring this year and retiring on an income the same as what I’m getting while I’m working,” he explains. “I’m not taking a pay cut, all being well. I recognise there are risks to it, but I think it’s very much depending on people’s circumstances.

“When you look at the cost of buying an annuity or something, all the risk is built into the cost, which makes it more expensive. So I think it’s great that I’ve been able to do what I’ve been able to do – my fund has gone up 22%, so it’s gone up £80,000 in four years.”

‘Treat each client case-by-case’

Just like Rayner, Informed Choice managing director and IFA Martin Bamford is clear if his conviction. That said, his views are a little different. While Bamford has sympathy with individuals forced to seek advice to access their DB money he believes “only a truly brave or crazy adviser would choose to work regularly with clients on an insistent client basis”. As such, Bamford argues advisers are under no obligation to deal with insistent clients at all.

The Cranleigh-based adviser continues: “We know that, except in a limited number of scenarios, it’s probably unwise to cash in your DB pension. Judging by the enquiries we often receive via our website, that important message hasn’t filtered through to the wider population. The scariest of those messages plainly offer a few hundred pounds in return for a signature to placate scheme trustees and facilitate the transfer.

“It’s not the fault of consumers that they need to take regulated advice or that they fail to understand the process, risks and liability associated with this form of advice.” Looking at the issue from his firm’s perspective, Bamford reckons only a truly brave or crazy adviser would choose to work regularly with clients on an insistent client basis. And, in his opinion, the ultimate arbitrator of suitability are the FOS and PI insurers, not the FCA, despite its guidance on the subject.

He continues: “With PI insurers running scared of DB transfers and actively punishing IFAs with any exposure to insistent clients, I would question why on earth you would place your business in this precarious position.”

Indeed, Bamford says the job of an adviser is not simply to take orders, and that facilitating a transfer just because a client is insistent could be a grossly irresponsible course of action.

“The insistent client issue reminds me of earlier attempts to bypass suitability by categorising advised clients as ‘execution-only’,” he adds. “In my experience, there is no such thing as an execution-only investor when an adviser is involved in the process. I’m yet to meet an adviser who can resist the temptation to share an opinion that could be construed as advice, which makes execution-only a misnomer.”

Continuing down that line of thought, Bamford says he would “back” advisers who refuse to work with clients for whatever reason they thought was just: “Financial advice isn’t a public service and the presence of legislation forcing regulated advice has never been the responsibility of the adviser. Consumers who feel aggrieved at this lack of access to regulated advice to faciliate their foolhardy decisions should write to their MPs.”

Planworks managing director Nathan Fryer, meanwhile, has dealt with an insistent client himself. The outsourced paraplanner recounts an individual who approached an adviser he once worked with. That client was absolutely adamant he wanted to access his final salary pension.

So, Fryer and the adviser presented the individual several options to find more cash for excess spending – the individual had no real income needs – and made it clear the adviser was not going to recommend he transfer away from his DB scheme.

Despite the advice against transferring, the insistent individual returned to the adviser and said he still wanted to go ahead with the transfer. Fryer explains: “So we said: ‘okay, we want you to write us a letter, in your own words, explaining why you want to continue doing this despite us telling you that it is not in your bests interest’, which he did.”

The client’s letter typically focused on wanting to be in control of his finances. “He wasn’t swaying,” Fryer continues, “and at this point, the adviser and I had a long conversation about what our next steps were. Our general thoughts were: ‘either we do it, or someone else will do it’. We’d rather we did it and know he went to a decent scheme rather than someone else do it – that was our school of thought.

“We just wanted to know that he was going to be invested in something pretty run of the mill vanilla and not going to go and get ripped off by someone else – and that’s the only reason we implemented it for him, despite the advice being not to transfer.”

In terms of how the sector should handle insistent clients, Fryer says each client should be considered on a case-by-case basis and, if an adviser decides to go ahead with an insistent transfer, everything needs to be documented. “Dot the I’s and cross the T’s, add notes from every conversation: you really need to make sure that the client understands why you’re telling them not to do it, and if at the end of that conversation they still want to do it, I think you need to try to help them,” the paraplanner adds.

Despite his intended objectivity, Fryer admits that, if he had his own adviser firm, he would not advise insistent clients. “With both the regulator and PI, I just think it is a hugely risky business,” he concedes.

In terms of whether advisers have a moral obligation to allow clients to make the most of pension freedoms, even at a possible risk to their businesses, Fryer is somewhat split in his opinion.

“I agree to an extent [that clients have the right to do what they want with their money], but if the client is telling you they want to achieve something that is just not achievable, it should [be a case of saying]: ‘Well, you just didn’t save enough.'”

“It’s not the adviser’s fault that they can’t achieve what they want to achieve, it’s the clients. And, if they haven’t done enough in the early years, then it’s not the advisers fault. The only time I think you can transfer under insistent client, is because you want to protect them from someone selling unicorns in Zimbabwe.”