15Apr

The issue of how financial advisers should deal with insistent clients has been a hot topic since the pension freedoms were introduced. Firms should now take careful note of a case in which the Financial Ombudsman Service (FOS) upheld a complaint made by an illiterate customer who chose to transfer her pension on an insistent client basis.

Portal Financial Services recommended that Mrs W, who could not read or write, remained in her employer’s final salary occupational pension scheme when she indicated that she wished to access lump sums for home improvements. However, when writing to her to confirm this recommendation, the firm also stated that she could take a different course of action as an insistent client, and enclosed an insistent client form. Mrs W signed and returned this form, but later claimed to have been confused by its content, and claimed it was never her intention to transfer out, adding that it was only after she retired in 2014 that she realised the transfer had gone ahead.

Ombudsman Adrian Hudson agreed with the initial decision of the FOS adjudicator when the firm chose to appeal the judgement. He ordered the firm to compensate Mrs W for the losses she incurred by transferring out, and to pay an additional £250 for the inconvenience caused.

Mr Hudson’s judgement reads:

“I cannot ignore the fact that Portal knew that Mrs W could not read or write. It was required to act in the best interests of Mrs W. Portal knew that Mrs W could be worse off if she transferred from her former employer’s pension scheme.

“I take the view that Mrs W’s circumstances were such that Portal should have acted with considerable caution. If it wished to act for Mrs W, it should have given all the information she needed in order to make an informed decision – and in a format that she would have been able to understand.

“I am not satisfied that Portal gave Mrs W sufficient detail about the benefits that she was giving up by transferring or what she could receive. In my opinion, had it done so, Mrs W would have seen the extent of the harm that would be caused by transferring and taking her lump sum.

The plan she transferred into would have required growth of 12% per annum to match the returns available from the occupational scheme. The insistent client letter sent by Portal included a number of complex terms, such as ‘critical yield’.

The firm argued that to have refused to deal with Mrs W on the grounds of her illiteracy could have constituted discrimination, and that she would not have signed the form if she did not understand its implications.

The Financial Conduct Authority (FCA) has promoted use by firms of a three stage process when dealing with insistent clients:

• Give a clear and concise recommendation, ensuring the client understands what is being recommended
• If the client indicates that they wish to take an alternative course of action, clearly explain that this is against the firm’s advice, and make them aware of the risks involved with the route they wish to take
• Clearly document on the client file the fact that the client has chosen to go against the professional advice they received

However, it is not clear whether this process was followed in this case – it may be that the FOS feels that additional steps should have been taken given the client’s circumstances. Firms should consider whether to make use of taped oral disclosure and recorded oral suitability reports when advising clients who cannot read or write.

The case prompted Keith Richards, chief executive of the trade association the Personal Finance Society, to repeat his recommendation that member firms should not process insistent client transactions.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.