How to complain about financial advice
As part of the administration of an estate, many probate practitioners have asked my firm to advise on the potential for redress as a result of a financial product that they feel was unsuitable. This process starts with understanding what the particular product does, how it was set-up, and what it was meant to achieve – and thus if it was demonstrably unsuitable. This is not always as straightforward as it seems.
Discounted Gift Trusts
Take, for example, a discounted gift trust. Like nearly all products, each variant of this contract type comes with different features dependant on what year it was taken out, with which policy provider, and what “whistles and bells” were added to the original contract by the adviser. Therefore, the deciding factor on suitability can vary.
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The most prominent factor in complaints on discounted trusts is the health underwriting that was undertaken at the time of establishing the trust. This health assessment is what determines the “discount” if death occurs within seven years of inception. Naturally, if death does so occur it is this “discount” which largely determines how suitable and effective the planning was.
Sadly, many advisers do not adequately check the health of the settlor at inception. Some may even suspect a terminal illness, but ignore a serious health impairment – because it may stand in the way of a product sale.
For a client with poor health a discounted trust may still have merit – but much diminished. The test will be on the “suitability” of the advice and how this is documented as having been researched and explained to the client at the time of taking out the financial product. Did the adviser stress that underwriting of health was important? Did the client wish to proceed in any event? How were these factors evidenced? These all become important questions to assessing suitability.
The Financial Services Authority (‘FSA’) governs the provision of financial advice in the UK. They require that advisers be able to demonstrate the suitability of advice, and that a “Suitability Letter” is written to the client formally explaining why the advice is suitable.
Using our example, it is more difficult, though not impossible, to demonstrate that a discounted gift trust was suitable if a client was terminally ill at the time of taking out the gift trust. This is because if the client was terminally ill at the time of starting the discounted gift trust the Revenue are unlikely to give much, if any, “discount” and so the rationale for establishing the trust (the suitability) may be brought into question.
Importantly, the advising firm must be able to demonstrate this suitability on into the future and, in practice, can be put to proof at any time in the future.
Putting to Proof
Just as probate practitioners are under a duty to be able to demonstrate the appropriateness of each step of their advice, so too are IFAs. Practitioners are familiar with the time consuming nature of handling a complaint. It is very similar for financial advisers.
The first step for the client is to make a formal complaint to the advising firm. This may be made either verbally or in writing, clearly using the word ‘complaint’, and explaining the reasons for dissatisfaction. The advising firm must then respond in a manner strictly prescribed by the FSA.
The firm has eight weeks within which to respond in writing, either supporting the complaint and offering redress, or, more typically, rejecting the complaint. The complainant may then either accept this response or may refer this on to the Financial Ombudsman Service (‘FOS’) for adjudication.
The “suitability” of any given financial advice is often moot. There are many factors to consider. Using our example of the discounted gift trust, the priority items that the FOS officer will want to see are: all of the letters sent to the client, the adviser’s motive in recommending the course of action, and any clear evidence of informed consent on the part of the client. After taking detailed representations from either side, the adjudicator will have the final say.
The discounted gift complaint is less likely to be upheld by the FOS if the adviser wrote clearly stating the importance of the underwriting, received little or no remuneration for the product sale, and holds signed documents confirming the client’s willingness to proceed despite the adviser’s cautions.
In practice, such a “belt and braces” approach is rarely taken by advisers. There will very often be holes, sometimes gapping, in an adviser firm’s back-dated case for suitability. The informed eye can spot these holes. This skill is important as an advising firm, often with their professional indemnity representative, will attempt to swamp the client, and latterly the FOS officer, with a confusing array of literature.
The more complex the complaint, and the more nuanced the policy features, the more necessary it will be for the complainant to obtain advice in their dealings with the firm and FOS. If the loss on the discounted gift runs into tens of thousands the firm’s PI providers are likely to instruct specialist legal advisers, who certainly will argue the nuances. The salient features must be kept at the top of the adjudicating officer’s agenda.
If the advice is judged unsuitable, the FOS will adjudicate to put the client back into the position they would have been had the advice not been taken. Clearly this requires assumptions to be made and is not an exact science.
Using the example, the FOS may require the firm to repay the commission taken from the discounted gift trust, along with the interest lost in the meanwhile.
If the discounted gift trust has fallen in value since inception, this fall is only likely to be paid as redress if the original investment risk was unsuitable. For instance, if the funds were previously held as deposits and the client had evidenced a low risk profile and yet these funds had been placed in equities, and then fallen in value.
Importantly, it is the duty of the advising firm to demonstrate why equities were suitable, not the client to demonstrate why they were unsuitable. The more evidence the adviser has to support this, the more unlikely the complainant’s case is to succeed in this respect. To justify a move from low risk to shares the adviser would, at the very least, need to have evidenced the client’s change of risk profile in the file, and to have written to the client explaining this increase in risk and that the share values might fall.
The limit on the enforceable redress that the FOS can hold a firm to is £100,000. This is per financial transaction or consequence of advice. Where the loss has been greater than this, the claimant can attempt to divide up the arrears of advice and complain separately, or if this is unsuccessful and the firm will not honour the excess, seek further redress via the courts once the adjudication has been made.
To conduct a review of potentially inappropriate investments in a client’s estate on death requires the skills of a qualified IFA who will be able to assist in making any formal complaint to the FSA. If you need such help, please contact me.
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