NAVIGATING HIGHER RISK AREAS OF ADVICE

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28 March 2023

The reduced annual CGT exemption – down to £3,000 in 2024/25 – will mean you need to do a lot of careful planning in the next few years if you handle any potential CGT disposals.

If you attended one of the Personal Finance Society’s (PFS) local conferences recently, you will have seen a presentation about the forthcoming tax changes and the impact on investors, who will be paying more income tax and CGT.

HMRC estimates an additional 235,000 people will need to report capital gains in 2023/24, whilst the Chartered Institute of Taxation believes a whopping 260,000 of us will have to complete self-assessment returns for the first time.

The skills of tax planning, aligned to the advice you give, are going to be crucial for many of your clients. For example, the PFS presentation discussed the use of tax advantaged schemes, such as VCTs, becoming more common as part of plans to maximise tax-free investment opportunities and mitigate CGT, but clearly these products are a much higher risk for most retail clients.

Record keeping

We thought it would be helpful to share some common themes we see when checking files relating to higher risk products, to help you avoid the compliance pitfalls.

At the risk of teaching granny to suck eggs, make sure you are up to date with your technical knowledge if you are dealing with a new area of advice, or one you don’t use very often. The responsibility lies with you, not the helplines or broker consultants. It is important to log all of your CPD too, to support your competence.

The biggest issue we see with higher risk areas of advice is a lack of information in the file detailing the risk discussions you have with clients. They may have a fairly balanced attitude to risk, but then suddenly decide they can tolerate going into a VCT or BPR scheme. Your file needs to show what their needs and objectives are and how your advice meets these needs.

Make sure the risk discussions you have with clients are captured and robust. What is their understanding of risk? How would they feel if their investments fell substantially? Do they have the need and ability to take risks with their money?

You also need to evidence and articulate why, if a client is normally a balanced or cautious investor, a VCT or BPR or other high-risk product is now suitable for them. This must be absolutely clear. Make sure you record the client’s knowledge and understanding of these products too.

Consider your Consumer Duty obligations, which require firms to ‘avoid foreseeable harm to retail customers’ as one of the cross-cutting rules. If your file doesn’t cover these areas properly, it would be hard to defend and demonstrate you have met the regulations.

Couples Attitude to Risk assessments

Another potentially problematic issue in file reviews occurs when a couple ATR is assessed as one, especially if a particular party has historically taken the lead on financial decisions and their partner has acquiesced.

Be careful in these situations. There is a chance the non-dominant person is being exposed to too much risk, so assess each individual separately. Again, document your risk discussions and use the risk profile questionnaire as a starting point.

We would always recommend each client is assessed on an individual basis. Make sure you have discussed their feelings towards taking investment risk, what knowledge and understanding they have of the product and ultimately, their ability to take risk too.

If you need support in a higher risk area of advice or you have a case you would like reviewing from a compliance perspective, don’t hesitate to contact us on (0161) 521 8641 or email: info@b-compliant.co.uk