Business ethics and protection against claims
Philippa Hann, partner of legal firm Clarke Willmott, recently talked to a room of financial planners about ethics within their firms and best practice for protecting themselves against legal claims
The Institute of Business Ethics says the most common ethical values include: integrity, fairness, honesty, trustworthiness, respect, openness – which are usually expressed through an ethics policy and a code of ethics.
Philippa Hann, partner of Clarke Willmott, opened her presentation at the recent CISI conference by pointing out that financial services has numerous ethical difficulties and potential conflicts, more than many other markets.
There are particular difficulties when running smaller advisory firms, she said, where there can be less resource to apply to these issues and added business pressures.
When it came to protecting their businesses, financial planners had to be fully aware of the trust clients have that they will do the right thing by them, she stressed.
Hann said that in almost every conversation she has had clients who come in to complain about the financial advice they had received, the client has said: “I trusted their advice and I didn’t ask questions.”
She reiterated: “The power that you have over people, whether you feel it or not, to persuade them to take one step over another is immense. It’s a huge responsibility. You really need to be cognisant of that when you are looking at your ethical practices.”
Citing defined benefit pension transfers as a challenging area at the moment, Hann gave the example of an adviser business owner who was receiving a growing number of enquiries along these lines. They were from employees of a company that had a DB scheme where people had discovered they could get significant amounts of money for transferring out and as the word got about within the company he had more and more people knocking on his door.
“He was nervous about taking on a lot of that kind of work,” she said. Having had a compliance officer look at his process, he called in Clarke Willmott to cast a legal eye over them. “He said, this is my process; where am I weak and why would you sue me?”
From a practical viewpoint, the first thing a lawyer will do if a client feels they have been misadvised is to call for the file, Hann told the audience. “And the first thing I look at is your terms and conditions of business.” This will establish the contractual relationship.
“I cannot stress strongly enough how important your contract is,” she said. “There is a phrase in the legal profession, “Contract is King”. If you are a small company, often contracts are looked at by compliance but they tend to look at things from the perspective of the clients and the FCA. Have a lawyer look at the contract from the perspective of when there are difficulties how you protect you and your business,” she suggested.
Clients have six years from the date of an investment or transfer to order court proceedings (with some exceptions to that period)) after which the Limitations Act applies, she pointed out.
Next, ensuring the suitability letter is clear and unambiguous is fundamental. There was significance in the fact that the first occasional paper that the FCA released was one on behavioural economics and how information is presented to clients, Hann pointed out.
She cited the example of an IFA firm that had tried several ways to elicit responses from clients to which they owed small amounts of money. They had little success until they tried bullet points, when responses went from 0.4% to 11%. “What they proved was that people don’t read things. So ethically, if you understand that, and you know that your client needs to understand what you are saying to them, then bullet points are so powerful,” she suggested.
Equally imp[ortant were file notes. “You need to take into account that human memory cannot be relied upon.” Hence, comprehensive file notes are key, she stressed. “The adviser may have discussed alternatives with the client but if it’s not in the paperwork there is no proof of that.”
What was important for adviser firms to realise, Hann stressed, was the need to keep robust files, with clear documentation that shows what action they took to ensure the client understood the advice and recommendations being made.
In respect of DB Pensions Transfers, one way of making things as clear as possible, Hann suggested, was to have a single-sided sheet illustrating the different alternatives and scenarios if they were to transfer their pension or if they were to keep it where it was. This would clearly set out the pros and cons for the client to see and digest, she said.
Another key area in terms of ethics and protecting a firm, Hann stressed, was where advisers had a contingent-based charging structure.
Hann stressed the importance of explaining the conflict of interest up-front. “You are duty bound to point it out in any case,” she said. “If there is anyone who is not having that conversation and putting it in writing to the client, then I would urge you to do that.”
Measuring the advice given
Hann asked planners if they measured how many people they advised and what they advised them to do. It was important to review, identify trends and what individual advisers are doing, she said.
This was particularly important for transfer cases, not just for people who are advised to progress to transfer but also those that were advised against it, maybe because they were taken through a triage process and didn’t tick enough boxes to go forward, which could be 90% of cases, with just 10% taken further. Lawyers will ask for that data, Hann said.
As well as having robust processes, it was important to ensure information is not being presented “in a way that is highlighting the benefits to the detriment of the risk involved”, Hann said.
Another good practice was to have advice peer reviewed – especially for sole practitioners, she added.
“Have a circle of peers you can contact to review your difficult cases,” Hann suggested. There was a sound legal reason to do this as well as for the comfort of testing what you say, she said. In cases of negligence there are three ways of bringing claims for damages against professionals in the financial services industry. These are:
1. Breach of COBS rules
2. Breach of contract
3. Breach of duty of care.
“Breach of the duty of care as a professional, is determined by a standard, which is the standard of a person’s peers. What a lawyer has to do is see whether any other body of advisers could have given that same advice,” Hann explained. “It can be really important to have that second view, or set of views, so when a lawyer reads the file, they can see that the advice was tested against the advice others would have given.”
“So, it is really important to have that second view. If you are a sole adviser, have a collaborative approach to difficult cases where you can go to your peers and say, ‘this is the problem do you think I’m doing this right?’, and then write that in the notes. Then, when a lawyer reads the file, they can see that the advice was tested against the advice others would have given. This can be a really good sound check if you feel your internal biases may be affecting the advice you are giving.”
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