Cognitive Impairment, an LPA and a Structured Product
Ada Okonkwo, 82, is widowed with an estate of £1.1 million held in a discretionary managed portfolio and cash. She has mild cognitive impairment recorded by her GP. Her daughter, Grace, holds a registered lasting power of attorney (LPA) for property and financial affairs. Her son, Michael, is not an attorney but has become closely involved. Michael wants £400,000 invested in a six-year autocallable structured product linked to a basket of indices, paying a 5.25% annual contingent coupon with a 40% capital barrier and a 1.5% arrangement fee. Ada says: 'I don't really understand it, but Michael knows best.' Grace is uneasy. In the same meeting Ada mentions giving £200,000 to her grandson for a house deposit. She cannot recall the previous meeting or the ongoing fee, but says she wants her money 'safe' and to leave something to the children.
1. Who is entitled to instruct you, and how should you assess Ada's capacity?
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The legal framework
Capacity is presumed unless there is evidence otherwise. The Mental Capacity Act 2005 requires a decision-specific assessment, not a global label. Mild cognitive impairment does not by itself remove capacity. The test is whether Ada can understand the relevant information, retain it long enough to weigh it, use it to make a decision, and communicate that decision.
Practical assessment
- Meet Ada alone as well as with family, at a time when she is most alert.
- Ask open questions about the £400,000, the six-year term, the 40% barrier, the fee and what happens if the indices fall. Ask her to explain the trade-off in her own words.
- Check whether she can recall the previous meeting and the fee. Inability to recall is relevant but not decisive; many clients forget details.
- Consider a specialist medical or neuropsychological opinion if doubt remains, and document why.
Who instructs
If Ada has capacity for this investment decision, she instructs, and Grace's LPA is not activated for that decision. Grace can support her but cannot override her. If Ada lacks capacity for the decision, Grace can act under the registered LPA, within its terms and in Ada's best interests. Michael has no authority to instruct. The adviser should not take instructions from Michael alone, however persuasive he is. If Grace is unsure about a large gift, she may need Court of Protection approval.
2. Assess the suitability of the structured product for Ada.
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Product analysis
The product is a six-year autocallable note linked to a basket of indices. It offers a 5.25% contingent coupon, but the coupon is not guaranteed. Capital is at risk if the 40% barrier is breached, and losses can be substantial. There is counterparty risk, early-redemption risk, basket complexity, limited liquidity and a 1.5% arrangement fee. A basket can be dragged down by its weakest component.
Client analysis
Ada says she wants her money 'safe' and to leave something to the children. She has mild cognitive impairment, cannot recall the fee, and is deferring to Michael. Her likely need for care fees and liquidity is high. A six-year lock-in with a 40% barrier is not 'safe'; it is a complex, capital-at-risk investment. It is likely unsuitable on objectives, risk tolerance, capacity for loss, time horizon and understanding.
Process
- Do not accept Michael's instruction. Explain the product to Ada and Grace in plain language, with a suitability report.
- Consider simpler alternatives: cash and short gilts for near-term needs, a diversified income portfolio for longer-term money, and possibly an annuity or care-fees planning.
- If Michael insists, record the conflict, the advice given and the refusal to proceed on an unsuitable basis.
- Consumer Duty requires evidence that the product is in the target market, delivers fair value and does not cause foreseeable harm.
3. What are the issues around the proposed £200,000 gift, and what safeguarding steps should you take?
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Gift authority
If Ada has capacity, she can make the gift, but the adviser should ensure she understands the amount, the loss of income, the IHT consequences (a potentially exempt transfer) and the care-fee implications. If she lacks capacity, Grace as attorney can only make limited gifts under s12 MCA 2005 - customary occasion gifts or small charitable gifts. A £200,000 gift to a grandson is not within that power without Court of Protection approval. It cannot be authorised by Michael.
Undue influence and deprivation
Ask Ada alone whether the gift is her idea and what she wants for herself. Consider whether Michael is pressuring her, and whether the gift would leave her unable to meet care fees. Deliberate deprivation of assets can be challenged by the local authority. The gift may also create friction between the children and affect the estate plan.
Safeguarding
- Follow FCA guidance on vulnerable customers: appropriate communication, consent to involve family, and a record of decisions.
- If financial abuse or coercion is suspected, make a safeguarding referral to the local authority and consider delaying the transaction.
- Document the capacity assessment, the family dynamics, the advice given and the reasons for any decision. Do not simply execute the family's instructions.