By Sebastian Elwell
With pensions freedoms now nearly 5 years old, there is now a cohort of retirees that are aging with the new freedom rules in place. Increased age brings increased risk of vulnerability. While age is not a cause of vulnerability, it does correlate strongly with risk of becoming vulnerable. This first ‘drawdown cohort' has become an experiment in social policy, where accessible pension wealth is mixed with increasing levels of vulnerability.
According to FCA Occasional paper No. 8 "A vulnerable consumer is someone who, due to their personal circumstances, is especially susceptible to detriment, particularly when a firm is not acting with appropriate levels of care."
- Aging population and financial services
According to FCA Occasional paper No.31 , "It's well established that the UK population is on average getting older. It is plausible that one in three babies born today can expect to celebrate their 100th birthday. While one in six of the UK population is currently aged 65 and over, by 2050 one in four will be. This changing demographic will have ramifications for public policy."
Our clients are exposed to a frightening array of threats, from scams to financial abuse, malpractice, to miss-selling and more. While these are not just issues for vulnerable clients, vulnerability can compound both the risk of and the consequences of these risks.
It is clear that clients in drawdown are at a much greater risk than annuity clients because the whole pension pot and future income can be stolen in a short space of time. Whatever sensible protections a client might implement, an unsupervised LPA can potentially circumvent these protections.
What can we as advisers do to better prepare and protect our clients from these risks in the event of lack of capacity?
A strategy to manage a client's finances in the event of lack of capacity is a core part of a solid financial plan. Creating a ‘what if' scenario and inviting the client to think about the issues is the first step in taking action in the plan.
Who will be managing the finances?
There are two basic options for clients that lack capacity. Either they will have chosen one or more attorneys under a Lasting Power of Attorney when they had capacity, or someone will need to apply to the Court of Protection for a deputyship order. Generally deputyships are seen as more complex, expensive, but importantly – more protective. Deputies must submit regular returns to the court and a ‘deputyship bond' will be required to protect the subject of the order.
LPAs can be made significantly more protective by including suitable administrative and supervision clauses. But in practice few LPAs are.
It is generally better to plan ahead than react to a crisis. The plan should include broad discussion of a safeguarding strategy. The adviser will likely need to make referrals to other specialist advisers such as solicitors to help with drafting and implementing a safeguarding strategy, which should include choice of attorneys, supervision clauses, access to information for the safeguarder and pre-authorised authority to raise concerns when identified.
As an adviser, it's important to conduct due diligence on your professional connections. Look out for relevant qualifications for your professional solicitors. The Society of Trustee and Estate Practitioners (STEP) and /or membership of Solicitors for the Elderly (SFE) is a good starting point for finding an appropriate solicitor, but it's up to you to make sure they have relevant experience and knowledge in this area.
Dealing with vulnerable clients is an area of interest and focus from the regulator, time spent making sure your processes and procedures are fit for purpose will be well spent!
Ideally the referral for an LPA comes from a planning meeting well ahead of the client may need it. However, life isn't always ideal. Interactions close to time of need with product providers is often the trigger for clients seeking advice. Many advisers will be familiar with the ‘DFM clause' which is a clause to make the provision of ongoing advice easier for discretionary fund managers. This clause is widespread and shows the power our profession has in influencing drafting of LPA documents through careful referrals. It is a clause that enables discretionary fund managers to continue to work without too much interruption to their service or getting paid.
If only we were as good at promoting safeguarding clauses for our clients!
Sebastian specialises in providing joined-up advice across the professions. As an Independent Chartered Financial Planner, a Fellow of the Personal Finance Society, holds the STEP Diploma in Advising Vulnerable Clients, and a member of SOLLA he has worked with accountancy and legal professions to advise vulnerable clients for 15 years.
To find out more about how cashflow planning can assist deputies and attorneys to inform their clients and allow the best decisions to be made in light of capacity, you can always contact my team and me at Switchfoot Wealth.
