While losses are an inherent risk of investing, what perhaps distinguishes this particular case is the fact that it centred around a vulnerable client.

Among other things was Hargreaves Lansdown’s alleged failure to identify the customer’s compulsive gambling addiction before it was disclosed and to safeguard his Sipp from the risks that the addiction posed.

But the ombudsman considered it “beyond dispute that Hargreaves Lansdown reacted correctly in the steps it took to safeguard the Sipp after it became aware of the addiction”, and was “not persuaded that there are grounds on which it should have identified the addiction”. The complaint was ultimately not upheld.

While acknowledging the unfortunate circumstances of the case, Keith Richards, chief executive of the Consumer Duty Alliance and chair of the Financial Vulnerability Taskforce, agrees the ombudsman’s decision was the right one. “DIY means DIY, and there are associated ‘self-insured’ risks compared to employing a professional.”

There are, however, lessons to be taken from this case, Richards adds.

“Sipp providers and platforms do have a consumer duty to spot vulnerability and offer support where considered appropriate. That doesn’t mean they are liable to compensate for poor outcomes however, unless a firm’s own failings caused or contributed to a loss.”

Might the outcome have been different post-consumer duty?

But as MorganAsh managing director Andrew Gething highlights, the circumstances of this particular case took place before the consumer duty came into force in July 2023.

“As the regulation makes the requirement to understand a consumer’s vulnerability, I suspect the Fos decision might have been different had this occurred after July 2023,” he says.

Gary Maude, director of advisory practice at TCC Group, a compliance consultancy, agrees that regulatory expectations have changed with the introduction of the consumer duty.

“If there is a material change in spending pattern that the Sipp operator identifies as a concern, it should consider contacting the client. Of course to do so, the operator needs consistent criteria for what equates to ‘unusual’.

“Similarly, if the client was advised, and one adviser was investing a significant number of clients into esoteric investments, there would be a regulatory expectation to look into this,” says Maude.

“The challenge is identifying the concern in the first place, and the best way to contact the client. It could be that there is a perfectly fine explanation for the change, but to act to ensure good customer outcomes it can be beneficial to contact clients who may be displaying concerning signs of known vulnerability.

“For example, the FCA has articulated that firms should use all reasonably available data to manage customer outcomes, and known patterns of activity should, of course, lead to the analysis of possible vulnerability. The challenge of differentiating between ‘normal’ vs ‘unusual’ patterns is key.

“Moreover, there is a wider ethical discussion as to the role of product providers, and the relative fairness of expectation that they should adopt the role of ‘parent’.”

DIY dangers

What this case also highlights, says Richards, is one of the “unintended consequences” of pension freedoms; the inevitable spike in DIY consumers expected to access pension pots, and the increased risk of foreseeable financial harm.

“At least the government thought to legislate the need for mandated advice of safeguarded benefits pots over £30,000,” Richards notes.

“And despite the controversy over British Steel and defined benefit transfers more broadly, many thousands of consumers have been protected from making poor life-changing decisions, and the increased freedoms have worked well for some.”

Gething from MorganAsh likewise notes how execution-only has a “far higher” risk of trading with those consumers who are vulnerable, as there is no assessment for vulnerability by an adviser.

“Therefore, there needs to be sufficient processes in place to assess consumer vulnerability, prior to progressing to trade,” he says.

So in addition to health, wealth and life events, Gething, whose MorganAsh Resilience System enables firms to assess consumer vulnerability, says that their system includes a specific attribute of ‘financial capability’ to help understand who is appropriate to trade execution-only, and who should get advice.

“Gambling addiction is an obvious vulnerability for those using execution-only trading platforms,” says Gething.

“The question is, what processes are in place to identify and discourage gambling behaviour, and how effective are they? It is unlikely that a firm’s processes will be 100 per cent effective. But firms must show that they have gone to reasonable lengths to identify such vulnerabilities.”

Maude from TCC Group agrees that without the benefit of financial advice, there is increased potential for harm if vulnerability is missed as a result.

“Sipp operators should have a clearly defined target market. And if the product is not designed for certain groups of vulnerable customers, the firm should put in place processes to help ensure that the product is not distributed to them.

“As circumstances can lead to clients becoming vulnerable after taking out the Sipp, it’s important that there are processes in place to help identify changes; for example, making it clear to the customer that if their circumstances change, they should contact the firm.”

But there is a wider and far-reaching risk in terms of privacy and GDPR, says Maude, citing advised clients as an example. “In what normal circumstances would an adviser ask about potential vulnerability outside of the norm, such as addictions? 

“Similarly, are advisers reasonably expected to differentiate between someone who likes to gamble, versus where gambling is classed as an addiction and therefore a vulnerable characteristic?

“Notwithstanding, most advisers would rightly be concerned that ‘interrogating’ clients about known or likely ‘addictions’ would do little to build rapport.”

Nevertheless, data and analytics are increasingly playing a big part in identifying customer vulnerabilities, such as analytics that identify key words or behavioural patterns, says Richard Barnwell, a financial services advisory partner at BDO, an accountancy and business advisory firm.

“However, there is no one-size-fits-all,” Barnwell adds. “Each firm has to look at its customer base, products and services to assess the best ways to identify and support vulnerable customers.

“A bank may be more able to analyse a customer’s spending patterns to spot gambling than other types of firms, such as Sipp providers. We anticipate this is a subject the Financial Conduct Authority will look at in more depth this year.”

Chloe Cheung is a senior features writer at FT Adviser