Vulnerable Client and an Unregulated Mini-Bond
Mrs A is a 78-year-old widow with £210,000 in a stocks and shares ISA and £40,000 in cash. She received a cold call from 'Sterling Recovery Group', which said it could recover losses from an earlier investment and recommended a five-year 'secured' mini-bond issued by an overseas company, paying 8.5% a year. The mini-bond is unlisted and is not on the approved list of her adviser, Clearview IFA. Mrs A asks Clearview to transfer £180,000 from her ISA to the mini-bond issuer. The adviser notices that she is confused about the caller's name, has recently been bereaved, and says her son 'doesn't need to know'. The issuer is not authorised in the UK, and the promotion was a website link sent by email. Clearview's policy is not to advise on unregulated products.
1. What regulatory issues arise from the promotion and the mini-bond itself?
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The email link and the cold call are financial promotions. Under s.21 FSMA, an unauthorised person cannot communicate a financial promotion unless an authorised firm approves it or an exemption applies. The overseas issuer is unauthorised, and Clearview must not approve or communicate the promotion unless it has the relevant permission and the promotion is fair, clear and not misleading under COBS 4. The 'secured' claim and the 8.5% return are red flags; the security may be worthless and the return implies high risk.
The mini-bond may also be a non-mainstream pooled investment or a speculative illiquid security, which is subject to restrictions on promotion to retail clients. The cold call from a 'recovery' firm is a classic scam, and the issuer is not authorised, so there is no FSCS protection. Clearview's policy not to advise on unregulated products is appropriate. The firm should check the FCA warning list and report the promotion to the FCA; it should not facilitate the transfer.
2. How should the adviser apply the Consumer Duty and the FCA's vulnerability guidance?
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Under the Consumer Duty (PRIN 2A), Clearview must act in good faith, avoid foreseeable harm, and enable and support Mrs A to pursue her financial objectives. It must consider the product's risks and the client's understanding. The FCA's vulnerability guidance (FG21/1) identifies drivers including health (bereavement, confusion), life events, resilience (she would invest 86% of her savings) and capability. The adviser should adapt the conversation, allow time, use clear language, and check understanding; if capacity is in doubt, the Mental Capacity Act 2005 process should be considered.
The advice would almost certainly be unsuitable under COBS 9: a five-year illiquid unregulated bond, 86% concentration, no FSCS protection, and a caller who may be a fraudster. The client's wish to keep her son uninvolved is a safeguarding concern, not a reason to proceed. The firm should not execute the transfer, should give a clear written risk explanation, and should document the vulnerability assessment. It should consider contacting a trusted person with consent and reporting the scam.
3. What should the adviser do if Mrs A insists on proceeding?
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If Mrs A insists, Clearview should still decline to act. It must not transfer the ISA money, approve the promotion, or accept an instruction that it knows is likely to cause serious harm. The firm can explain that she is free to deal directly with the issuer, but it should not facilitate the transaction or provide a veneer of regulated respectability. It should put its concerns in writing and keep a record.
The adviser should escalate to the MLRO: the cold call and 'recovery' story may indicate fraud, and a SAR to the NCA may be required if there is suspicion of criminal property. The firm should also report the unauthorised firm to the FCA and Action Fraud. If there is an immediate safeguarding risk, the firm should consider contacting adult social care or, with consent, the son. Any fee for the meeting should be fair and disclosed; charging for a refusal to act could itself be a Consumer Duty issue.