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Compliance: The importance of documenting options considered

3 May 2020

Steve Bailey, director ATEB Consulting, considers a recent FOS decision and when to record the options considered and then discounted for a robust reason.

“If it’s not written down, it doesn’t exist.” How often have you heard that sentiment expressed by some compliance person?

The continued relevance of that statement was roundly confirmed by a recent FOS decision (ref. DRN4555535). In summary, the complaint related to a client who had been recommended to buy an annuity with a five-year guarantee period. The client died after three years and his widow complained that her husband should have been recommended to take a ten-year guarantee. The firm defended the complaint on the basis that the client’s original intention was to maximise income by not taking a cash sum and eschewing ANY spouse’s pension. That much was evidenced in the fact find document.

Given the client’s starting position, the firm believed that the adviser had done well to persuade the client to take a five-year guarantee.

The Ombudsman accepted that the inclusion of a spouse’s pension or escalation would have significantly reduced the level of income and that the firm was right to discount these. However, the Ombudsman found that having concluded that a single life level annuity was the right solution, the firm should have considered all options within that solution, including the option of a ten-year guarantee period.

The firm responded that this had been discussed but there was no evidence of the ten-year option having been quantified. It transpired that this option would have reduced the income by a mere £1.25 per week. The Ombudsman concluded that:

  • Had the adviser identified this minimal reduction, it would have obviously represented good value and would/should have been recommended, especially as the client was known to be in sufficiently poor health to qualify for an enhanced annuity
  • Had the client been informed of the minimal reduction for a further five-year guarantee, it is likely that he would have accepted that recommendation.

Needless to say, the firm was instructed to compensate the complainant for the ‘lost’ five years of income.

So, considering all options is vital but that means more than merely discussing them and discounting them out of hand. Options can only be considered to have been adequately examined if quantified and, crucially, documented.

If it exists, write it down

This reversal of the statement describes good practice. There is no point in having a comprehensive and detailed discussion with a client about personal circumstances, objectives and aspirations if that information is not documented in just as much comprehensive detail!

When doing file reviews, we frequently see information about the client stated in the suitability report that seems to have appeared out of nowhere because there is no mention of that information in any of the fact find notes.

Now, it must be said, that alone does not make the information invalid. It could well be true and dredged from the adviser’s memory in the preparation of the report. But the fact that the information only appears in the report does, at the very least, potentially reduce its credibility to any third party, such as the FCA, the FOS or an external file reviewer who examines the file at a later date.

Similarly, there is no point in considering all potential solutions, if there is no evidence that this was done. There is no rule requiring advisers to discount all products, “I recommend an OEIC because … I have discounted investment bonds because …, national savings because … etc.” The requirement is to justify that the recommended product is suitable.

However, there are some scenarios where it is prudent to ensure that all options that might potentially achieve the desired outcome have been considered and discounted for a robust reason – and for those to be documented. That is particularly important when a recommendation relates to a pension transfer or replacement business such as a pension switch.

Transfer advice

There are often non-product/non-transfer solutions that could achieve the client’s objectives, including, but not limited to:

  • deferring a decision on transfer until closer to retirement age;
  • using other assets to raise immediately required cash;
  • borrowing to raise immediately required cash;
  • protecting legacy through term or whole life cover.

Replacement business

Similarly, when considering a switch of, for example, all existing pension plans to a new plan, there are some obvious other options that should be examined. For example:

  • consolidating plans into one of the existing plans;
  • switching some but not all plans;
  • changing the asset allocation of an existing plan to ‘correct’ any perceived risk mismatch.

Solutions can have options too

Consider a client who needs life cover. Should critical illness be included? Should it be joint life for a couple or two separate policies?

Our view and potential action points

Steve Jobs reputedly said, “A lot of times, people don’t know what they want until you show it to them.”

While the adviser’s job is to recommend a course of action, it is not always possible to narrow the recommendation to one option, even with the most thorough fact finding. That is when the client should make the final choice, based on full clear information. But clients can’t choose an option if it is not shown to them. So,

  • Ensure that all relevant options are identified and investigated;
  • Recognise when the client should make the final decision between options;
  • Provide sufficient information to enable the client to decide;
  • Consider using smart suitability report writing software like ATEB Suitability to facilitate consistency and compliance;
  • Consider including external file checks as part of your compliance processes.

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