Despite pressure to come down on the market like a ton of bricks, the FCA has taken a measured approach to improving standards
Another week, another barrage of headlines about an FCA intervention on defined benefit pension transfers.
The regulator’s latest missive focuses squarely on the standards and processes advisers employ when carrying out pension transfer business.
Specifically, the FCA wants to raise qualification requirements for pension transfer specialists and ensure advice does not focus on one particular part of the process.
But before getting into the details, it is worth considering why the regulator has decided intervention is necessary.
The origins of the latest regulatory clampdown lie in the findings of a review of transfer business which began in October 2015. That review covered a total of 88 DB transfers, where the recommendation was for the client to give up their valuable guaranteed benefits.
Of that sample, fewer than half (47 per cent) were deemed “suitable”, with 17 per cent “unsuitable” and 36 per cent “unclear”. A review of the suitability of fund and product recommendations post-transfer found 35 per cent were suitable, with 24 per cent unsuitable and the remaining 40 per cent unclear.
Even in a best-case scenario, a market where one in six transfer recommendations – and almost a quarter of subsequent product and fund recommendations – are not in a client’s best interests is clearly not ideal. The scale of DB transfer activity since the introduction of the pension freedoms in April 2015 adds staggering context to these findings.
According to the FCA, somewhere in the region of £20bn to £30bn is moving out of DB schemes each year. Although it is impossible to extrapolate a market-wide faulty advice figure from these numbers (transfers worth £30,000 or less might have been carried out on a non-advised basis, while others will have gone ahead after a negative recommendation), it is likely to run into the billions.
Despite significant pressure from various directions to come down on the market like a ton of bricks, the FCA has taken a measured approach to improving standards.
It has mandated that all pension transfer specialists hold Level 4 investment advice qualifications, with advisers given until October 2020 to meet this new requirement.
The logic here is straightforward and reasonable. If an adviser is going to make a recommendation on a pension transfer, the FCA expects both the transfer itself and where the money will be invested subsequently to be considered as part of the suitability process.
In line with this, the regulator has set out its expectations of the processes advisers should have in place when undertaking pension transfer business. In particular, where an outsourced advice model is used, the FCA expects both parties to work together to:
- Collect necessary information to inform both the pension transfer advice and the associated investment advice;
- Undertake risk profiling to assess both the client’s attitude to transfer risk and attitude to investment risk;
- Recognise that investment advice should consider the impact of the loss of any safeguarded benefits on the client’s ability to take on investment risk.
The FCA also emphasises the importance of considering a broad range of risks when making a transfer recommendation, rather than focusing myopically on investment risk.
In addition, it is changing its rules so a suitability report is required regardless of whether the advice is to transfer or stay put.
Although these proposals feel sensible and proportionate, they present serious challenges to advisers who operate an outsourced pension transfer model – particularly as there is no guarantee over where liabilities would lie in the event of a claim to the ombudsman.
Indeed, we have already seen a number of large firms cease business on this front, as they rewire their models or exit the market altogether.
While PS18/20 includes plenty more changes for advice businesses to absorb, it was something the FCA chose not to recommend – at least for now – that generated most of the reaction.
Few topics divide opinion across the sector quite as severely as contingent charging, so the decision not to pursue an outright ban at this stage was bound to draw the ire of some.
It is important to note a ban has not been ruled out altogether, as the FCA is simply gathering evidence on any link between the charging method and poor outcomes.
Work and pensions committee chairman Frank Field was particularly scathing, suggesting the regulator had “buried this in the long grass”, as “unscrupulous advisers circle like vultures around consumers”.
Field is clearly entitled to his views but the FCA’s job is to protect consumers, rather than producing soundbites. Banning contingent charging would significantly alter the dynamics of the transfer market and risk leading to fewer people – particularly those on low incomes – taking advice.
Ultimately, the aim here is to ensure more people are able to pay for good-quality regulated advice, so any measure that risks reducing the supply of advice – or cutting off those with less ability to pay upfront – needs to be carefully thought through and evidence-based.
Tom Selby is senior analyst at AJ Bell