Firms should consider a proactive review of their pension transfer strategy ahead of the regulator’s request for data
The spectre of pension transfer misselling continues to hang over the financial services industry, with the latest news surrounding British Steel Pension Scheme members threatening a fresh backlash against advisers.
Firms wishing to advise clients on the transfer of pensions from occupational schemes have long been required to have relevant, specialist qualifications, to undertake specific CPD activity in the area and to have stringent procedures for checking such advice.
Yet there are still concerns over widespread poor advice and misselling.
In its review last year of 13 adviser firms active in defined benefit transfers, the FCA identified less than 50 per cent of cases as demonstrably suitable, with 17 per cent unsuitable and the remaining 36 per cent unclear.
These figures, along with the concern over advisers transferring members out of the BSPS, has led the regulator to announce a wider ranging review of advisory standards for DB transfers.
Although we have seen some mudslinging between ministers and the FCA, swift action is required by all parties if we are not to suffer another damaging scandal.
The review will require all firms that have the permission to advise on pension transfers to submit additional data to the regulator during 2018. It is not clear when this information will be requested, what it will look like or what timescales firms will have in order to collate and submit it at this stage.
Providing a different dynamic this time is the multiple parties potentially involved in the process (including introducers), what services they are delivering and the actual costs incurred by the client.
So, what should advisers be doing to prepare?
First, firms should be checking the basics of the required permission for this type of business. Do they have sufficiently qualified staff? Are CPD and training records appropriate, robust and clearly documented? Is ongoing competence for the specialists demonstrable? Are policies and procedures clear and compliant? Can all instances of DB transfer advice be identified? What due diligence has been undertaken on the use of any third parties?
Secondly, firms should seek to know if there are any liabilities lurking in their back book of business. To do this, a sample review of historical advice should be considered that can provide an objective and independent status report to the management.
The sample reviewed should be risk based, perhaps focusing on known weak points – for example, times of business pressure, advisers now known to be less than fully competent, specific DB schemes known to offer particularly good member benefits, insistent clients and so on.
Where weaknesses are identified, appropriate remedial actions should be taken and, if necessary, further reviews performed on similar cases to identify the extent of any problems.
The process should be managed as independently as possible, taking into account the firm’s size and complexity, with clear reporting lines to the senior management and appropriate, meaningful MI produced to demonstrate the standards achieved.
It has always been the case advisers need to start from the premise that a transfer is not suitable for the client and then work to prove otherwise.
Diminishing investment returns and changes to critical yield calculations have made the job of proving suitability even harder in recent years, so it is critical that, where advice to transfer has been given, there is robust and evidential arguments to support the decision.
The FCA has undertaken similar exercises in the past when it has requested data from specific sectors of the adviser community, and this has often been the precursor to a wider and more in-depth review.
While it is not yet clear what the FCA is expecting in terms of outcome or future actions, it would be prudent for firms to get on the front foot.
Simon Collins is managing director, regulatory, at Eversheds Sutherland