An unregulated mini-bond, a bereaved client and a firm incentive
Elsie is 82 and was widowed five months ago. She has £520,000 in savings, a home worth £600,000 and income of £31,000 a year. She wants to invest £200,000 in a five-year mini-bond paying 9%, introduced by a friend. The product is unregulated, is not covered by the Financial Services Compensation Scheme and locks up capital. Tom, her adviser, works for a firm that will receive 3% 'marketing support' from the provider, and Tom's bonus is partly based on product sales. Elsie says the investment is 'secure' and mentions that she has been forgetting appointments; her daughter is working abroad and is not involved. Tom's draft file note says 'client understands the risks'. The firm's risk profile tool scores Elsie as cautious. She asks Tom to 'just do it' before her daughter returns.
1. Identify the regulatory and ethical issues raised by the proposed sale.
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The main issues are suitability, vulnerability, capacity, conflicts of interest and financial promotion. The product is unregulated, illiquid and not FSCS-protected; a 9% return is a red flag for risk. Investing £200,000 would be about 38% of Elsie's savings and would lock up capital for five years, while her stated risk profile is cautious. The claim that it is 'secure' is inconsistent with the product terms, so Tom must challenge it.
Elsie's recent bereavement and forgetfulness are vulnerability indicators. Tom must consider whether she has the capacity to make the decision and whether she is being influenced by her friend. The firm's 3% payment and Tom's sales-linked bonus create a clear conflict; disclosure alone may not manage it, and the firm should consider whether the incentive is consistent with the Consumer Duty and its conflicts policy.
The draft file note is inadequate because it records a conclusion, not the assessment. Tom should not rely on a client instruction to proceed where suitability and capacity are in doubt.
2. What should Tom do before any sale, and how should he document his actions?
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Tom should pause the application and complete a full suitability assessment, including the client's objectives, financial position, risk tolerance, capacity for loss and liquidity needs. He should obtain the product's legal documentation and confirm its regulatory status, charges, exit terms and compensation position. He should explain the risks in plain language and check Elsie's understanding, rather than accepting her description of it as 'secure'.
Because of the forgetfulness and bereavement, he should use the firm's vulnerable-customer process, make reasonable adjustments and consider a capacity assessment. With Elsie's consent, he should contact her daughter or another appropriate person. If there is doubt about capacity, he should not proceed until the position is clarified, and he should consider whether a lasting power of attorney is in place.
The file should record what was discussed, the risks explained, Elsie's responses, the vulnerability indicators, the conflict and why the recommendation is or is not suitable. Any decision to proceed against advice should be documented with the client's own words, not a generic statement.
3. How should the firm respond to the 3% payment and Tom's sales-linked bonus?
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The firm should treat the payment and bonus as conflicts that must be managed, not merely disclosed. Under the FCA's rules, inducements must not impair the firm's duty to act in the client's best interests, and the Consumer Duty requires firms to act to deliver good outcomes. A 3% payment from a provider of an unregulated product, combined with a sales-linked bonus, creates a strong risk that advisers will favour the product regardless of suitability.
The firm should review the arrangement against its conflicts policy, consider whether the payment is permissible, and if not, decline it or stop the sale. It should also review whether the bonus structure is consistent with good customer outcomes and whether it creates a financial incentive to recommend high-risk products. Disclosure to Elsie would not cure an unsuitable recommendation.
The firm's monitoring should include a review of all sales of the product, a check on vulnerable-client handling, and a root-cause analysis if similar cases are found. Tom should be supervised and the case escalated to compliance before any application is submitted.