It is not its intention that access to high-quality transfer advice and products becomes too difficult, but more detailed guidance is needed
On 22 March, the FCA wrote to the chief executives of pension providers with the conclusions from its latest work on the defined benefit to defined contribution transfer market.
The thrust of the Dear CEO letter is that DC providers accepting transfers from DB schemes have specific duties to clients, and the fact a client has received regulated advice on the transfer may not absolve the provider completely if they ultimately suffer detriment as a result of the advice received and the subsequent transfer.
The letter was quickly followed by an announcement from well-respected Sipp operator Intelligent Money that it had taken the decision to stop accepting DB transfers over concerns it could be held liable for recommendations made by advisers.
Concern has followed over the potential impact of the approach being taken by the FCA on the transfer market and members’ ability to obtain transfer advice.
In many ways, this latest Dear CEO letter should not come as a surprise. It very much continues the trend started by the regulator in its previous work on Sipp operators’ duties, primarily related to non-standard investments.
In the FSA’s 2009 thematic review of Sipp operators, it stated they were mistaken if they considered “they bear little or no responsibility for the quality of the Sipp business they administer, as this is the responsibility of clients’ advisers”. While, at the same time, it acknowledged that “firms acting purely as Sipp operators are not responsible for the Sipp advice given by third parties such as IFAs”.
This theme was further developed in the FSA’s subsequent 2012 thematic review and the FCA’s 2013 finalised guidance, where it stated that Sipp operators’ systems and controls should “gather and analyse MI that will enable them to identify possible instances of financial crime and consumer detriment”. The FSA/FCA’s previous work was framed largely around principles, in particular Treating Customers Fairly, and the implementation of Prod gives the FCA a further tool to drive change in this area.
Taking all of the above together, there are some clear messages that can be read.
Much of the FCA’s focus is on systems and controls, and the gathering of relevant MI that can identify trends of potential concern.
This is largely common sense and firms with good governance will already have much of this in place.
Firms should also note the clear reference to the “senior manager function holder”, i.e. the Senior Managers Regime will make it easier for the FCA to hold to account an individual at any firm which fails in this area.
Any regulated firm in the DB transfer chain cannot dispute this is an area of high potential consumer detriment, and consumers need as much protection as possible from poor outcomes that can have a significant impact on the rest of their lives. It is also in all firms’ Senior Managers Regime interests to prevent, rather than cure, such harm, for the purposes of both public confidence in the industry and keeping Financial Services Compensation Scheme levies at a minimum.
But at the same time, it cannot be the FCA’s intention that access to high-quality DB transfer advice and products becomes very difficult or even impossible.
If we assume the FCA’s intentions are the right ones, what it is aiming to achieve is an additional layer of protection for clients that will enable bad practice/unsuitable advice to be identified as early as possible, without making providers responsible for any and all unsuitable advice given by an adviser to the same extent as if the provider had itself given that advice. Of course, achieving that balance is easier said than done.
What is required now is further and more detailed guidance from the FCA on what good and bad practice looks like, partly in the form of examples from work already completed.
Given the high cost of any mistakes in this area, what firms want is as much certainty as possible, and this will continue to allow clients to access the high-quality advice and products they need. It is unlikely the FCA will provide any “safe harbour” rules but the more guidance that can be provided, the better.
If businesses like Intelligent Money, and the many advice firms I have spoken to, all of whom have their clients’ best interests at heart, are pulling out of the DB transfer market, perhaps the balance is not quite right yet. Additional certainty would also improve the professional indemnity insurance position.
Most firms want to do the right thing for their clients, but cannot do so if they consider it exposes their business to an unacceptable level of risk, so more work is
required to encourage these companies to remain in or even re-enter the market.
Alan Hughes is partner at Foot Anstey LLP