The commission-driven recommendation
Mr Ade (72) is a retired teacher with ₦8m in savings, a modest pension and no dependants. He wants capital preservation and an extra ₦500,000 a year to cover care for his wife, who has dementia. His adviser, Kemi, works for a firm that has set a quarterly sales target. Kemi recommends a 10-year structured product linked to an equity index, with an 8% headline coupon, a 6% early-exit charge, and issuer credit risk. The product pays Kemi 4% commission. Mr Ade's son attends the meeting and says his father seems confused about the product. Mr Ade says, 'Kemi has always been helpful; I will sign whatever she says.' Kemi's file contains no capacity assessment and no comparison with a money-market fund or annuity. The firm's compliance manual requires a suitability report and disclosure of commission. Kemi asks whether she should proceed because the client is insistent.
1. Identify the ethical and regulatory issues in Kemi's recommendation.
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Suitability and best interests
Mr Ade's stated needs are capital preservation and reliable annual income of ₦500,000. A 10-year equity-linked structured product with issuer credit risk and a 6% early-exit charge does not match those needs. The headline 8% coupon may be conditional, capped or paid only in certain market conditions. The recommendation appears product-led rather than needs-led.
Conflicts of interest
The 4% commission and the firm's sales target create a conflict. The client must be told the commission in cash terms and the conflict must be managed. Kemi should not let a target influence the advice.
Vulnerability and capacity
The son's comment that Mr Ade seems confused triggers a duty to assess capacity and vulnerability. 'I will sign whatever she says' is a sign of undue deference, not informed consent. No capacity assessment is on file.
Disclosure and records
The compliance manual requires a suitability report and commission disclosure. The file lacks a comparison with simpler alternatives. Without these records, the firm cannot demonstrate that the advice was suitable.
Ethical principles
Integrity, competence, fairness and client best interests are engaged. Proceeding because the client is insistent is not a defence if the client lacks capacity or does not understand the product.
2. What should Kemi do before any sale, and what alternatives should be considered?
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Before any sale
- Pause the transaction. Do not obtain a signature while capacity is in doubt.
- Assess capacity using a documented, proportionate process. Ask Mr Ade to explain the product, the risks, the exit charge and the effect on his wife's care in his own words. With consent, involve the son and, if needed, the family doctor. If he lacks capacity, do not sell; refer to the attorney or the court process.
- Clarify needs and affordability. Establish the care costs, the wife's expected duration of care, the pension income, and the capital that must remain accessible. A 10-year lock-up is incompatible with uncertain care costs.
- Disclose commission and conflict in writing and explain the sales target.
- Compare alternatives in a suitability report:
- a money-market or short-dated bond fund for capital preservation and liquidity, with a realistic yield;
- a level or inflation-linked annuity for guaranteed income, while recognising irreversibility;
- a diversified low-volatility portfolio with a cash reserve;
- splitting the ₦8m: enough cash for two years' care, an annuity for essential income, and a small growth allocation for legacy.
- Record the rationale for whatever is recommended, including why the structured product was rejected.
Illustrative arithmetic: ₦8m at 4% gives ₦320,000 a year, below the ₦500,000 target. An annuity at 6% might produce ₦480,000, close to the target, but it is irreversible and may not rise with care costs. The adviser must show this trade-off rather than presenting an 8% headline as income.
3. How should the firm document and supervise the case?
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Documentation
- Record the vulnerability indicators, the capacity assessment, the son's involvement and Mr Ade's own explanation of the product.
- File the commission disclosure, the conflict-of-interest management and the comparison of alternatives.
- Record the client's stated objectives, the wife's care needs, the liquidity requirement and the risk tolerance.
- If the structured product is still considered, document why it is suitable despite the exit charge and issuer risk, and show the effect of an early exit on care funding.
Supervision
- Escalate to compliance before the sale because of the vulnerability and the sales-target conflict.
- Check whether the firm's target scheme encourages inappropriate sales; remove or override the target for this case.
- Require a second reviewer for sales to clients over 70 or with capacity concerns.
- Set a review schedule - at least annually and after any change in care needs - and record who will contact the family.
If the client insists
Insistence does not replace suitability. If capacity is intact and the client understands the risks, the adviser may proceed only after documenting the advice, the alternatives rejected and the client's informed decision. If capacity is not intact, do not proceed. The firm should be prepared to defend the advice to the regulator and the client's family.