The Ethical Pressure to Churn
Marcus is a newly qualified adviser at a small firm. His manager pressures him to move a long-standing client, Mrs Okafor (72, widowed, moderate risk), out of her existing low-cost multi-asset fund into the firm's own 'model portfolio', which carries a 1.8% annual charge plus a 4% initial charge. The client's current fund costs 0.6% and has performed in line with its benchmark. The manager says the switch is needed to 'hit the quarter's targets' and that Mrs Okafor 'won't notice the charges'. Marcus's suitability report draft shows no material change in the client's circumstances or objectives.
1. Analyse the ethical and regulatory issues in the proposed switch.
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Regulatory issues
- Advisers must act in the client's best interests and provide suitable advice (FCA Conduct of Business rules and the Consumer Duty). A switch that increases charges from 0.6% to 1.8% plus a 4% initial charge, with no change in circumstances or objectives, is not demonstrably in the client's interest.
- The 4% initial charge alone would cost Mrs Okafor thousands and must be justified by a clear benefit she does not currently need.
- The advice must be independent and not driven by targets; the manager's instruction to hit sales targets is a conflict of interest that must be managed and disclosed.
Ethical issues
- Churning - unnecessary switching to generate commission/charges - breaches the client's trust and the profession's integrity principle.
- The comment that she 'won't notice the charges' is a red flag: exploiting a client's limited engagement is a breach of fairness and transparency.
- Marcus's duty is to the client, not the firm's quarterly targets.
Conclusion: the switch should not be recommended. The suitability report should record why the existing fund remains appropriate.
2. Describe the steps Marcus should take, including how to handle the manager's pressure.
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Steps
- Decline to recommend the switch and document the rationale: no change in objectives, higher charges, no added benefit.
- Record the conflict - note the manager's instruction and the target pressure in the file.
- Discuss with the manager, setting out the Consumer Duty and suitability obligations in writing.
- Escalate to the firm's compliance function or senior manager if pressure continues; the firm must have a whistleblowing route.
- Communicate with Mrs Okafor honestly: explain that her current fund remains suitable and that no action is needed, and confirm in writing.
- If the firm insists, consider the FCA's whistleblowing channels and the firm's own procedures; Marcus's regulatory obligation is to act with integrity even at personal cost.
Judgement point: the exam is testing whether the candidate recognises that client interest overrides commercial pressure, and that the correct response is documented refusal and escalation, not quiet compliance.