Mental incapacity: the next big financial scandal

Although the Mental Capacity Act 2005 (MCA) is now almost eight years old, few (if any) of the major financial institutions appear to have integrated it into their day to day processes, leaving incapacitated clients at risk of abuse and the financial institutions at risk of major litigation.

Case study

I was recently asked to assess a lady with a diagnosis of dementia. She had been admitted to the care home six months earlier with acute confusion. Now, 6 months later it was felt there had been a significant improvement in her mental capacity, and I was to check her ability to manage her property and financial affairs.

In short, despite her 'significant improvement' she still believed it was 1978, and a pint of milk was worth 15 pence. When asked about the price of a new TV, she replied: 'Now you're trying to trick me. For a normal black and white one it's about £35, but if you want one of those new fancy ones it's about £50-£60!' Clearly, even in her improved state she lacked capacity.

Imagine then, that just prior to admission six months earlier, she had re-mortgaged her house, taken out personal loans and credit cards to the value of over £200,000!

How could this happen?

It is no secret that the whole notion of mental capacity can be very confusing to those that do not properly understand it, and financial institutions and advisors are not excluded from this. What we are finding is that due to their lack of understanding, many financial advisors and institutions are just not aware of their obligations and the consequences of not checking a clients' capacity to enter into a financial contract.

I have lost count of the discussions I've had with financial advisers and bank staff, where they have stated, 'It has nothing to do with me. It's not up to me to check'.

Irrelevant information

With a lack of ownership and understanding comes a lack of inertia to change. Many of the large financial institutions are still using processes and paper work that were in place prior to the MCA's implementation, which means the information they collect does not enable them to identify if an individual is at risk due to reduced capacity. Nor will it enable them to defend their decisions if challenged.

Disjointed approach

Through our work with individuals and corporations, we are aware that this lack of understanding and information about their customers' mental capacity means that the financial industry has yet to adopt a cohesive approach to the problem. This in turn exacerbates the issues further, creating an environment of conflicting ideas and approaches to the issue.

Is there a solution?

The short answer is yes. The long answer is that there needs to be a coherent strategy that both educates those within the financial sector, and targets a number of different factors to enable the financial institutions to identify the risks, and then act quickly and appropriately. We have already started working with forward thinking individuals, groups and companies within the financial sector to achieve this.

Conclusion

The reality of the situation is that banks and other financial institutions and service providers are sitting on a huge debt of aged risk that continues to grow on a daily basis. Products such as the Pension Draw-down Scheme mean that the financial sector will continue to target a highly vulnerable client base, without adequate checks and procedures to properly protect either themselves from litigation or their clients from financial abuse. Unless something is done now to prevent it, mental incapacity will be the next financial scandal.

Tim Farmer is Managing director of Specialist Mental Capacity Practice, TSF Consultants. Tim can be reached on tsf@tsfconsultants.co.uk or 0333 577 7020.