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Are providers really on the hook for DB transfers?

Michael Klimes examines whether the FCA is taking a harder line against providers

After dividing opinion with its Dear CEO letter, providers are looking to further clarity from the FCA

On 22 March, the FCA sent a so-called Dear CEO letter to the heads of nine major product providers, reminding them of their responsibilities when it comes to defined benefit transfers. The letter lays out what providers need to consider when designing pension products in the context of moving from a DB to defined contribution pot. But it has caused a degree of confusion and prompted some providers to ask whether the FCA is shifting the responsibility for advice suitability on to them. One sentence in the letter was picked out as being particularly problematic.

It says: “We [the FCA] expect you [product providers] to have appropriate measures in place to ensure that products are being recommended responsibly and appropriately, in accordance with the Treating Customers Fairly Principle.”

When Money Marketing asked the regulator to clarify if it now expects providers to be responsible for suitability, it said: “We do not expect pension providers to be responsible for the suitability of advice provided to consumers by advisers, but we do expect them to understand the underlying drivers to form an assessment on whether harms are being caused to their consumers. This is in line with our existing rules and published guidance.”

The FCA has issued guidance to Sipp operators on accepting investments as far back as 2013, noting that the significant potential for harm to customers puts transfer procedures high up its priority list.

The FCA has reviewed DB transfer advice on a number of occasions over the past two years, and the letter is the latest feedback it has released.

Despite the FCA’s clarification, three Sipp providers – Intelligent Money, DP Pensions and Westerby Trustee Services – have pulled out of the DB market so far over concerns about suitability.

A recent Money Marketing poll asked whether providers should be responsible for ensuring products are recommended in accordance with the Treating Customers Fairly Principle.

Fifty-three per cent answered no, 38 per cent replied yes and 9 per cent were not sure.

The market remains divided, so what can we deduce about the significance of the FCA’s letter for providers? Does it represent a genuine change in the way it supervises DB transfers?

The latest news, views and analysis from Money Marketing on DB transfers

Do providers face more scrutiny?

There is plenty of digging to be done to decode the meaning of the Dear CEO letter and how it relates to broader work the FCA has conducted on transfers up to this point.

Money Marketing has established the FCA has written to the heads of nine major product providers and it appears most of the focus is on life companies at the moment.

Although the FCA says it has sent the letter to a select group of firms, it also points out the document applies to those businesses that have not received it directly.

Aegon, Aviva and Scottish Widows are all understood to have received the letter.

Other firms, such as AJ Bell, Intelligent Money, JLT Group, Curtis Banks, Hargreaves Lansdown and Nucleus, are understood to have not. Intelligent Money chief executive Julian Penniston-Hill argues the letter is applicable to life companies, discretionary fund managers, platforms and Sipp providers.

He says: “I suspect the Dear CEO letter is a pre-emptive move for something bigger as it is no secret the FCA will find it easier to regulate a small number of large providers with centralised processes and systems, rather than many small advisers that potentially lack these.

“The problem is the letter can be potentially interpreted in two ways. The FCA has the principle of being clear, fair and not misleading. This letter appears to fall short of those principles.”

Aegon pensions director Steven Cameron does not interpret the letter in such stark terms but warns the watchdog should be careful about how heavily it intervenes.

He says: “What’s important is that we have an effective market that works for consumers seeking advice in this complex area.

“This won’t be the case if FCA interventions lead providers to feel unable to accept DB transfers. We hope this is not the FCA’s intention and are keen to work with advisers and the FCA to create an environment where all involved are clear on their role in delivering good member outcomes to those considering transferring.

“We will not be stopping transfers on the basis of this letter but will be working with the FCA to understand what it wants.”

Expert view

FCA must offer more clarity on adviser checks

The Dear CEO letter can be read in a number of ways, which has raised concerns with providers as to the level of detail they need to go into when accepting DB transfers from advisers. If taken to the extreme, it could be read such that providers need to check that the advice given by these qualified advisers is appropriate. Even if a basic review is done of the advice given, to check it at least ticks some boxes, that would be a challenge for providers to do.

We understand that the FCA wants to protect consumers from harm and that is the purpose of this letter, which to my knowledge was only sent to the larger providers in the market.

This is an odd stance because the same issues should apply to all providers accepting this type of transfer, unless there has been seen to be less due diligence done by those with larger books of business.

It is positive that the FCA is open to discussions on this issue and it is pleasing to see that it has confirmed its intention isn’t for providers to check the suitability of each transfer. I still feel that more clarification is needed with regards to the actual checks that are required, and I am sure the FCA will be giving further clarity.

Claire Trott is chairwoman of the Association of Member-Directed Pension Schemes

Business as usual

Others have a different view and see the FCA’s intervention as a natural progression from the work it has done on the advice process around transfers. That includes increasing qualification requirements for pension transfer specialists and ensuring advisers keep an eye on where the money ends up. The central database the FCA has set up on firms involved in DB transfers to help monitor the sector better is part of this as well.

Scottish Widows – which received the letter – says it only accepts advised DB transfers and already carries out the suggested checks outlined by the FCA.

It also says it was not specifically targeted for the letter which, like all Dear CEO letters, was an open one and sent to a wide range of firms.

Meanwhile, Aviva head of savings and retirement Alistair McQueen says: “We have received the Dear CEO letter, and we continue to serve the DB to DC transfer market. The Dear CEO letter has not changed this position. We support the FCA’s intention of ensuring its customers’ interests are best served. Aviva always works to ensure its products and services meet the needs of its customers, and the rules of the regulator, and will continue to do so.”

The letter has not forced any dramatic changes at the Nucleus platform either, according to product technical manager Rachel Vahey.

She says: “We have had a look at the letter online. It fits into the work the FCA has been carrying out for the past 18 months, and its efforts to make sure DB transfers are executed in the best way possible and with the clients’ interests at the heart of the advice. This letter seems like a natural extension to its current work.”

Vahey adds: “We are not intending to stop accepting transfers from DB schemes.

“Instead, we are now carefully considering the letter to establish if it has any implications for our processes and how we work with advisers. As part of our working processes, we conduct light due diligence on adviser firms, checking if they have the appropriate FCA authorisation.

“We also collect management information on transfers, including identifying whether they are from a DB scheme, and work to identify any trends and issues.”

JLT head of Sipps Richard Prior welcomes the letter and argues it is good the FCA reminds providers of their duties to prevent complacency.

He says: “This letter challenges providers to think about DB transfer advice sensibly and identify trends that are at risk of producing negative outcomes for clients.

“There seems to be a suggestion in the letter that providers are checking advisers’ authorisation status retrospectively and not continually.

“There are three things you can do to check on transfer processes: a history check on the adviser, where the money is being invested and collecting sufficient management information to see if there are bad trends emerging.

“I don’t see the letter as putting more onus on providers as there is not anything out of the ordinary from what the watchdog has already done.”

Adviser view

Kate Shaw
IFA, Financial Life Planning

I have read the letter and I am leaning towards the view the FCA is not asking providers to take responsibility for suitability. That is our job but it is also not clear what the FCA is asking providers to do.

The sentence that is really important is: “We expect you to have appropriate measures in place to ensure that products are being recommended responsibly and appropriately, in accordance with the Treating Customers Fairly Principle.”

It is the only sentence that mentions products being recommended and, from where I sit as an adviser, it seems the FCA needs to clarify what it is exactly expecting providers to do.

Hargreaves Lansdown senior analyst Nathan Long says he is also encouraged by the contents of the letter.

He says: “We’ve long held the view that DB transfers are a niche transaction and are suitable in only a minority of circumstances.

“Our own experience shows us that only one in every 20 enquiries to transfer we receive culminates in a positive recommendation from an adviser.

“DB transfers represent a small part of the total received and we feel the controls already in place are sufficient to allow us to monitor activity. As an example, checks are made when a transfer application is received to assess the adviser is able to provide the advice before we’ll proceed. We’ll continue to accept DB transfers where a positive recommendation has been made.”

He adds: “The landscape for these transfers already has a requirement for advisers to take responsibility for their recommendations.

“Trustees check advice has been taken and now this extra level of due diligence ensures providers are playing their part too in stamping out any malpractice.”

While there are contrasting interpretations of the exact significance of the FCA’s letter, a shared perspective among some is it could have been written more clearly. The criticism is that even though the FCA later clarified its position after sending the letter, this has not been enough to end the confusion.

Pension Scams Industry Group chair Margaret Snowdon says: “The FCA letter is well-meaning but it is confusing. If it makes decent providers withdraw from the market then this will not be a good thing as there will be less scope for clients to transfer to a solid provider.

“It makes a huge difference where the responsibility for suitability lies because if it were to rest with the provider, then advisers could be let off the hook for the advice they give.

“Advisers could say it is the providers who are responsible for suitability as they accepted the transfers of assets.”

With the FCA’s work still ongoing, it makes sense for advisers and providers to follow any future announcements the watchdog makes on the subject closely.

If they are not sure what the regulator is asking them to do, a phone call to clarify matters is the sensible course of action.

In the long run, it is better to be safe than sorry, especially on a subject as controversial and sensitive as DB transfers.

Seven FCA guidelines for providers on transfers in the Dear CEO letter

1. Documentation and tools – Any tools or documentation you give to advisers need to be up to date.

2. Governance and risk management – You should consider completing second- and third-line reviews of DB activity since pension freedoms were introduced.

3. Remuneration structures – Staff carrying out frontline business development may have their pay linked to many different measures, so consider meaningful measures of quality.

4. Management information – You need to ensure your management information is sufficiently detailed to manage the risks from DB pension transfers.

5. FCA permissions procedures – If during a retrospective review, you identify a case where adviser permissions have been changed or removed, then check the firm still has the correct permissions and act accordingly.

6. Information you give to distributors – Ensure your processes for review, governance and quality assurance for the messages you provide to adviser firms are accurate.

7. Product design and target market – In regularly reviewing DC products, you should be able to show how you have taken the needs of customers transferring from DB into account.



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There are 4 comments at the moment, we would love to hear your opinion too.

  1. This list a seven points appears to cover pretty well everything imaginable, and then some, short of requiring providers to check in microscopic detail every piece of paper on the adviser’s file for each and every case submitted.

    Providers are not compliance overseers, yet this list of procedures and processes that the FCA is now saying they must follow appears very much to seek to thrust upon them exactly that responsibility. I anticipate that many more than have already will decide that the burdens and costs of adhering to them all are so excessive that they’ll just close their doors to any more DB transfers. As a result, advisers in the DB transfer market will find themselves struggling to find any providers willing to accept such business.

  2. I think this is a complete pre-hanging operation, and I cannot believe how naive the life companies continue to be. If every DB transfer proves to work out well, they might just get away with it. If too many people transferred their DB benefits out (either with out without their advisers complicity), squandered a lot of it and are begging on the streets as a result, then the usual process will commence. The press and MPs will carpet the regulator who will lash out by making providers pay up. How many times have we seen this before? Only, every time.

    As an aside I am getting fed up to the back teeth with the way the language is being contorted and twisted completely out of shape into this strange meaningless Regulatorese. Small wonder no one can understand each other any more and the FCAs communications are met with blind incomprehension. How one suffers a number of “harms” (harm being a non-quantifiable noun), or indeed, in this contaxt what exactly is harm? If you mean monetary loss, then flipping well say it. It’s not a grazed knee is it? Perhaps, the FCA are seeking to formally codify the compensation of mental anguish.

  3. I also want to add, that, for those with long enough memories, we recall the dreadful, nay monumental, mess up by the FSA when they published (yes, actually wrote down in a Money Advice leaflet) that DB scheme benefits were guaranteed. No qualification.

    There’s a school boy error if ever there was one.

    And it ought to also be noted that leaving a DB benefit in situ is not always the right economic option either. Don’t forget, the British Steel farrago came about precisely because Tata and the gov’t had done a deal to give the benefits a haircut. What about transfers from the BHS scheme? Should one have taken the TV before the deficit was crystallised? Were TV’s paid at 100% of value beforehand and not after?

    We don’t know. You simply cannot put one form of benefit on a pedestal to the exclusion of others. It’s poor regulation.

    That said, the FCA is right, there has been a lot of dubious advice provided on DB transfers.

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