Thematic Examination: Independent Financial Advisers – investment services to vulnerable persons

The importance of regulating conduct: protecting customers including those who may be vulnerable

There are four guiding principles that drive what we do at the Jersey Financial Services Commission (JFSC). One of these is to reduce “the risk to the public of financial loss due to dishonesty, incompetence, malpractice or the financial unsoundness of financial service providers”.  An integral part of this responsibility is to monitor the protections afforded to vulnerable persons.  This is an important matter, and is something that the JFSC have signposted we would be actively assessing as part of our onsite examinations (see paragraph 11.2 of our guidance note The provision of investment services to vulnerable persons under the Code of Practice for investment business (the Guidance).

This thematic examination focuses on those firms holding a Class D Investment Business licence (those who give investment advice but who are prevented from holding client assets by virtue of a condition of registration).  Such licence holders are otherwise known as Independent Financial Advisers (IFAs).  We will be reviewing the conduct of IFAs, and in particular the way in which IFAs identify and interact with vulnerable persons, as well as the measures they put in place to afford such persons appropriate protection. 

Having the highest regard for the interests of clients

Principle 2 of the Investment Business Code of Practice (IB Code) provides that a registered person (such as an IFA) “must have the highest regard for the interests of its clients”.   What this means is clarified under paragraph 2.1 of the IB Code which states that registered persons “must act with due skill, care, and diligence to fulfil the responsibilities that it has undertaken”.  This is further unpacked at paragraphs 2.2-2.30 of the IB Code.

Investment advice to vulnerable persons

As part of the obligation to have the highest regard for their clients, the IB Code requires registered persons to identify those customers who may be classified as “vulnerable” and afford them “appropriate protections”.  This makes it incumbent on registered persons to consider  who might be a vulnerable person, and how to interact with them throughout the course of the client relationship. 

Who might be considered vulnerable?

As noted at paragraph 6.1 of our Guidance there is no set definition of a vulnerable person.  However, very broadly, a vulnerable person may be considered to be “an individual whose personal circumstances can increase their susceptibility to financial detriment, particularly where a registered person is acting without appropriate care or diligence”.

Vulnerability may come in many guises and registered persons must be alive to any characteristics or situations which could result in a person being or becoming vulnerable, or changes which may mean that an individual’s vulnerability increases.

For example, a client may be suffering from some form of bereavement, such as the death of a loved one, or the breakdown of a relationship. These are classic examples of “personal circumstances” which may increase a client’s “susceptibility to financial detriment”. Likewise, certain factors connected with age may render a client vulnerable. However it is important that registered persons do not fall foul of discrimination. A young or elderly client may be particularly financially astute and may therefore not require tailored or additional measures intended to protect vulnerable persons. 

It is therefore important that registered persons give consideration to who may present as a vulnerable person and put in place adequate policies and procedures to assist them to informedly and appropriately identify vulnerable persons.  It is expected that in doing so registered persons will have regard to the Guidance (set out in more detail at sections 6 and 7 of the Guidance) and that they will tailor their practices for those so identified. 

What are “appropriate protections” for vulnerable persons?

Principle 3 of the IB Code provides that a “registered person must organise and control its affairs effectively for the proper performance of its business activities, and be able to demonstrate the existence of adequate risk management systems”.

What may be considered appropriate protection for a vulnerable person will depend on the specific vulnerability(ies) an individual may have.  For example, translation facilities may suffice for those who have financial acumen but encounter a language barrier, whereas a cooling off period may be applicable for those who exhibit signs of financial desperation and/or distress.

Vulnerabilities may also be layered and change over time. One such example may be a person with a learning disability who has recently lost a loved one. Whilst such an individual may have already been identified as being vulnerable or potentially vulnerable due to their learning disability, a registered person (in this context, an IFA) would be expected to consider what, if any, further consideration or action should be taken on behalf of this individual in light of their recent bereavement. For example, if could be that information is always provided verbally to this individual as they struggle to digest information in writing. Perhaps, in light of their bereavement, the IFA considers it would be beneficial for this person to have a trusted family member attend the next meeting, or increase the meeting length, or set up a follow up meeting, or encourage a cooling off period, or perhaps a combination of all of these measures. It may be that in the particular circumstances, notwithstanding the bereavement, the IFA considers no additional steps are required and they document their rationale for coming to that conclusion.

The JFSC  expect all registered persons to consider whether or not they need to alter their practices and/or client interactions depending on the vulnerabilities a person may present.  It is also expected that registered persons will be able to demonstrate how they have put such changes into practice.

Making use of the Guidance

The Guidance does not include an exhaustive list of who may be considered vulnerable, nor does it include an exhaustive list of measures which may afford vulnerable persons with appropriate protections.  As such, registered persons may need to think outside the Guidance and tailor their approach.  Departure from the Guidance may therefore be considered appropriate, provided registered persons can demonstrate that the measures they chose to implement adequately identify vulnerable persons and provide them with appropriate protections in accordance with the IB Code.

Notwithstanding its limitations, the Guidance can assist registered persons to recognise circumstances which may render a person vulnerable (or potentially vulnerable) and help registered persons to consider some ways they may adapt their policies and procedures to acknowledge and cater for the needs of vulnerable clients. It is expected that registered persons will utilise the Guidance where it is relevant and appropriate to do so.

Key areas of focus for this Thematic

The key areas of focus in this thematic examination include:

• Policies and procedures: do registered persons have appropriate policies and procedures in place relating to:

- the identification of vulnerable persons as required by Principle 2 of the IB Code? 

- the provision and implementation of appropriate protections for vulnerable persons as required by Principles 2 and 3 of the  IB Code?

• Risk Assessment: do registered persons undertake adequate assessments of vulnerable persons’ risk appetite as required by Principle 2 of the IB Code?
• Suitability of advice to vulnerable persons: do registered persons ensure that the way in which they present their advice to vulnerable persons is suitably tailored as required by Principle 2 of the IB Code?
• Ongoing monitoring: do registered persons ensure that adequate procedures are implemented to ensure that the investment services that it provides to vulnerable persons are regularly reviewed at appropriate intervals as required by Principle 2 of the IB Code?

Further reading:

The Investment business Code of Practice

• Investment Business Code of Practice — Jersey Financial Services Commission (jerseyfsc.org), in particular Principles 2 and 3 of the IB Code.

The guidance note: The provision of investment services to vulnerable persons under the Code of Practice

• The provision of investment services to vulnerable persons under the Code of Practice for investment business — Jersey Financial Services Commission (jerseyfsc.org) in particular sections 6-11 of the Guidance.