The Financial Ombudsman Service’s True Potential ruling is a warning for all advisers

The Financial Ombudsman Service (FOS) published an interesting decision recently regarding a ‘non-advised’ switch into one of True Potential’s funds, which puts the national’s business model under the spotlight.

In broad terms, that business model appears to operate in the following way:

• An adviser at an authorised advice firm and whom “owns” their own client bank (i.e. has the servicing relationship) will agree to join True Potential.
• After the adviser joins True Potential, the adviser’s clients are “bulk mailed” by True Potential telling the clients that the adviser has moved to True Potential.
• The clients may then receive a “direct offer” mailing from the adviser, acting for True Potential, concerning certain True Potential funds/investments.
• If the client transfers their current investments into the True Potential funds/investments, the adviser receives a payment from True Potential.

This is certainly how the FOS has understood the arrangement, although it made a point of saying True Potential appeared to be reluctant to disclose the full terms of the contract between the adviser and the national, or the amount of the payment to which the adviser would have been entitled had the client in question not complained following the transfer into the True Potential fund.

In this case, the client in receipt of the direct offer did transfer their investments, but then complained they had received unsuitable advice from True Potential to do so. True Potential disputed that advice had been provided at all and/or that, if it had, True Potential was responsible for that advice. The FOS disagreed on both counts and made an award in favour of the client.

The events in question took place in July 2021 but the type of business model described is worthy of scrutiny in the context of Consumer Duty.

Leaving the specific facts aside, where a client has a longstanding relationship with an adviser, under which the client may well have received full financial planning advice, and the client then receives a direct offer from that adviser at a new firm, with the opportunity to transfer their investments (upon which they were advised) into a new proposition (but without any advice being provided on that transfer), I would expect both the FOS and regulator may question if that process is compliant with Consumer Duty.

At least, I would expect the FCA to require the firm making the direct offer to discharge the relevant elements of Consumer Duty in relation to that process.

It does not appear to be unreasonable (i.e. it seems fair and reasonable, to use the applicable test applied by the FOS) that the client may consider they are being advised by their former adviser when they receive the direct offer (even if it states no advice is being provided).

After all, that is the relationship the client has enjoyed with that individual adviser to date. In this particular case, the transfer was made following at least one meeting between the adviser and client (at which the client alleged advice had been given, which True Potential disputed) and so the facts were more nuanced. However, even in the absence of such a meeting, if the client assumed they were being advised I think that would be perfectly understandable.

Even if very clear warnings are given that advice is not being provided (in this case, the FOS considered such warnings were given but were not conclusive, particularly given the further contact between adviser and client), the very broad principles of the Consumer Duty may allow the process in its entirety to be challenged – i.e. is the firm communicating the direct offer:

• Acting to achieve good outcomes for retail customers
• Taking all reasonable steps to avoid causing foreseeable harm to customers
• Ensuring its communications:
  • Meet the information needs of retail customers
  • Are likely to be understood by retail customers, and
  • Equip retail customers to make decisions that are effective, timely and properly informed.

When the direct offer relates to transferring what may be the customer’s entire savings and investment portfolio (upon which, to date, they have been advised) without receiving any advice at all? That would appear to be a relatively high bar to clear.

This is another example of how Consumer Duty could have a very significant impact on firms’ current operating models and cause significant change in the market.

This article was originally published in Money Marketing.