Personal finance does require personal responsibility

This article was originally commissioned for Inner Workings, a monthly column written by Tom Murray, in the  October 2018 edition of the Actuarial Post.

It’s rare, in the world of personal finance, that I find myself completely taken by surprise but the ruling of the Financial Ombudsman Service (FOS) in the recent opinion on Portafina was one such occasion.  FOS ruled that a client, who had transferred out of a defined benefit scheme into a SIPP was incorrectly advised, and therefore Portafina were ordered to put the client back into the financial position he would have been in if he had never transferred out.

So far, so straightforward.  But on closer examination of the Ombudsman’s decision, the situation isn’t quite so clear.  In the background to the decision, FOS sets out that Mr C (the client) wanted access to a €15,000 tax free lump sum, which would be available if he transferred to a SIPP, in order to build a conservatory and have a “rainy day” fund.

It then gives the details of the letter Portafina sent to Mr C, which clearly state that the critical yield in the current pension scheme is 10.1%, i.e. future investments would need to hit this level for him to retain parity with what he already had.  On this basis, Portafina would not recommend transferring.  This seems pretty clear to most people with any knowledge of current interest rates – 10.1% is a high barrier to set to just break even.

The letter did say it could help him to transfer if he still wanted to, but that Portafina would have to treat him as an insistent client – a category defined by the FCA as one who “wishes the firm to facilitate the transaction” different from the one which the firm has recommended. As if to ram home the point, the ‘insistent customer’ form that he had to sign and return to state that he still wanted the transfer, confirmed that he understood what the critical yield is and that he was “aware that it is unlikely that my new policy is going to achieve a growth rate of 10.1%”.

Five days later Mr C received a report from Portafina clearly stating that it was not recommending the transfer but that they could help him to carry it out.  Portafina recommended investment in various funds in the SIPP, which were higher risk than Mr C, who was rated as moderately cautious, would be expected to be in.  The result was a poor performance and an inability to realise his funds as the investments were relatively illiquid compared to many other funds that were available.

The whole saga is a sorry mess and there perhaps are areas where Portafina could have performed better, particularly in the area of the recommended investments which do appear to be at a higher risk than they should have been.  But, by insisting that Mr C’s financial position is restored to where it was prior to transfer, the regulator is going a lot further.  It is saying that, despite a number of verbal and written warnings against the transfer, Portafina were effectively deemed to have advised him to transfer by virtue of the fact that they treated him as an insistent client, which they didn’t.  They merely advised him on where to put the money once it had been released.

This decision appears to absolve Mr C from any responsibility for managing his own financial affairs and looks like providing an avenue for exploitation by any investor who overrode the financial advice from his or her broker and then regretted it with hindsight.  Surely this cannot be right.

It is surely no one’s fault but my own, if the horse I put my money on in the 3.30 at Doncaster chooses to amble around the course as if on a Sunday stroll, and no one thinks Paddy Power should give me my money back.  Of course, if they had been paid to advise me to bet on that horse, it would be a different matter.  Similarly, the adviser recommended in this case that Mr C leave his money where it was.  The fact that the adviser later gave poor advice about the investment should surely leave him only responsible for restoring the client’s position in the SIPP and not further back to before the transfer.

By linking the two together, the regulator is not doing anyone any favours.  What we are likely to see now is a huge reduction in advisers prepared to deal with an insistent client as they could end up responsible for whatever happens afterwards.  The result will be bad for clients as well, as they could end up with their money trapped in a scheme they don’t want to be in because no one is prepared to carry out instructions to transfer it out.

There does come a time when personal responsibility needs to be taken.  In this case, Mr C seems to be responsible for the initial decision to take the money out and release the lump sum.  The poor investment advice for the remainder may be Portafina’s fault but blaming them for the entirety of the process is likely to lead to a large number of spurious claims based on “buyer’s regret”, another knock in general confidence in the reliability of independent financial advisers and a reduction in services provided across the industry as advisers refuse to touch insistent clients with a forty-foot barge pole.  It is a classic case of an over-protective regulator doing more harm than good.

About the author

Author Denise Garth

Denise Garth is Chief Strategy Officer responsible for leading marketing, industry relations and innovation in support of Majesco’s client centric strategy, working closely with Majesco customers, partners and the industry.