Aamina Zafar examines lessons to learn from a recent FCA ruling on pension switching
Lessons must be learnt from a six-figure fine for an independent financial advice firm that recommended pension switches and failed to manage conflicts of interest, according to financial advisers and regulatory experts.
In December 2020 LJ Financial Planning (LJFP) was fined £107,200 for providing its customers with unsuitable pension switching and transfer advice and failing to manage its conflicts of interest.
Between March 2010 and December 2012, the Warrington-based firm recommended that 114 customers transfer their pensions into self-invested personal pensions (SIPPs), without providing any advice on the underlying investments which were to be held in those SIPPs.
These investments were often high-risk, esoteric and illiquid.
The total amount invested in this way by LJFP’s customers was just in excess of £6m.
In making its recommendations to customers, LJFP was required to consider not only whether a SIPP was a suitable investment vehicle for the customer based on their individual circumstances, but also whether the investments held within the SIPP were suited to the customer’s needs and appetite for risk.
The Financial Conduct Authority (FCA) found LJFP failed to make these assessments.
Kusal Ariyawansa, a Chartered financial planner at Manchester-based Appleton Gerrard Private Wealth Management, says: “This seems to be a classic example from the dark days of mis-selling where greed, a lack of knowledge, dabbling and vested interests all culminated in failure on multiple fronts. The lesson to take from this is that firms and their advisers must start by focusing on their clients and what is right for them. Once that is satisfied, a simplified approach is needed without there being vested interests over any unconventional or esoteric investment strategy.”
Interestingly, IFA Scott Gallacher believes the fine highlights how difficult it is for adviser firms to genuinely offer unbiased advice if they also have their own pension arm or offer discretionary fund management (DFM) services.
Mr Gallacher, a Chartered financial planner at Leicester-based firm Rowley Turton, says: “The key lesson might be for those advisers who are also connected to provider firms, such as a pension company or DFM, to be extra cautious about ensuring that their clients are aware of that connection, and the potential conflict of interest, and that any advice they give is genuinely unbiased. This is one of the reasons that my own firm, Rowley Turton, has avoided going down the route of launching its own pension arm or DFM. In my opinion, advisers should advise and for me it is important not to blur those lines.”
Firms simply washing their hands of any investment advice, particularly to financially inexperienced clients, is baffling
LJ Financial Planning has so far paid more than £2.6m in redress to 41 clients and is expected to undertake a customer-contact exercise to compensate any outstanding eligible investors.
Chartered financial planner Aj Somal is concerned there may be more cases like this in the future.
The IFA at Birmingham-based Aurora Financial Planning says: “Firms simply washing their hands of any investment advice, particularly to financially inexperienced clients, is baffling. Unfortunately, I believe there will be more cases like this that will come to light and it is the client that suffers heavy losses as a result of these historical cases.”
The fine has also highlighted the importance of better and faster regulation, according to IFA Daniel Elkington, who believes the watchdog was too slow in its response to reprimanding the firm.
The Chartered financial planner, who is currently also studying for a PhD, researching professionalism and financial planning at Manchester Metropolitan University, says: “The time that this was conducted was pre-retail distribution review and the regulator has taken nine years to get round to agreeing that it was not sound practice. This is not an acceptable standard of professional regulation, considering that the FCA felt that the failings were ‘especially serious’.”
The FCA also warned that between January 2013 and November 2017, the firm failed to manage potential conflicts of interest between itself and its customers. According to the watchdog, LJ Financial Planning had recommended Amber Financial Investments as a wrap platform for its customers. As a result, customers could make investments through DFM Tatton Investment Management, without knowing the financial advice firm had shareholdings in these companies.
Mark Steward, the FCA’s executive director of enforcement and market oversight, warned that investors should be able to rely on their financial advisers to manage conflicts fairly and “to disclose them so consumers are able to make better informed decisions”.
Interestingly, Robert Sinclair, chief executive of the Association of Finance Brokers, believes the case highlights the importance of full disclosure to clients.
He adds: “What has become clear is that there are firms that may have tried to segregate their pensions activities or advice in one area but try to operate on an execution-only basis in another. However, our regulators have said they do not see such a distinction, even I fear where there might be distinct legal entities. Disclosure to the consumer would have to be fully acknowledged that, in starting in an advised arena, the migration to a different ‘accountability’ had been fully recognised.
“Where an advice firm is being paid to assist in a transaction, it must be explicit about all its earnings from all sources and disclose those to the customer. This is to allow the consumer to assess whether the amounts being earned might compromise the duty of agency and care owed to them by their adviser. RDR brought clarity over fee agreements, however firms will have to be careful they do not end up compromised by looking to supplement earnings through investing and receiving dividends or income from related transaction activity.”
Aamina Zafar is a freelance journalist