All eyes have been on the FCA since unsuitable advice on defined benefit transfers hit the headlines, with strong debate over what measures it would take to clean up the market.
Networks and national advice firms have expressed concerns about a pivotal FCA policy statement made in March, over how it might increase their workload, make it harder to renew professional indemnity insurance and push up the cost of coverage.
The statement introduced rules including the requirement that advice to transfer out of a DB scheme must come from a personal recommendation. It also replaced the standard transfer value analysis requirement with a duty to check a client’s individual options and show the value of benefits being given up in a transfer.
Some networks and large advice firms say these rules have forced them to tighten their due diligence processes around transfers. Others say the guidance complemented what they already do and is more of a reminder of what the FCA expects.
There is widespread agreement that unregulated introducers must be closely scrutinised to prevent unsuitable transfers from happening. But networks are also expressing fears over the price of PI insurance for when cases slip through the net, and the impact that premiums are having on margins for legitimate business.
Networks, with controlled processes across firms, are arguably better placed than smaller advisers with limited resources to ensure DB transfer suitability, but how are they making sure they do not fall foul of the FCA’s changing rules?
Tightening up processes
Intrinsic wealth proposition director Phil Carroll says the policy statement on pension transfers has not affected its advisers’ day-to-day business, as the rules were already within the network’s standard procedures.
For instance, the policy statement says that when signing off advice, the pension transfer specialist has to be aware of where the money will be invested.
Intrinsic already required its pension transfer specialists to be fully responsible for all of the advice they give and to deal directly with the client themselves, insisting a personal recommendation is made.
This ensures the client is clear on who is providing the advice and also means the transfer specialist is confident that they have up-to-date information.
Carroll says the new transfer value comparator and appropriate pension transfer analysis test that have to be used by 1 October may require administrative changes. However, he does not anticipate any issues as existing procedures already have a very similar requirement to the FCA’s new standards.
Some networks and firms say the new rules have forced them to tighten up their due diligence processes around transfers
In light of the new rules, Tenet has provided appointed representatives with a new guidance document to help them handle transfers. It has also limited introductions so they are only made within the network, as it is not convinced that a multi-adviser model can be effectively risk managed where another adviser running the investment is outside of the network.
Tenet says it may be possible for directly authorised firms to find a way of working that satisfies the FCA’s expectations in this regard but they are potentially exposing themselves, as a DB transfer adviser, to the risk of claims should an external firm fail in the future.
Like Intrinsic and Tenet, Openwork says it keeps the market under regular review and the FCA’s updated guidance has complemented their proposition on DB transfers. This includes the use of a revised transfer value comparator to ensure clients are presented with their transfer options in a clear and consistent manner.
To protect itself from rogue introducers Openwork takes no “farmed” introductions in the transfer market. All referrals made to Openwork’s small group of pension transfer specialists are from in-house adviser sources and are subject to a structured triage process.
When it comes to securing PI insurance, Openwork says it has continued to secure competitive rates because of a low volume of recommendations and rigorous processes. But Openwork notes that insurers appear cautious because of the “disproportionate risk that they see in DB transfers”.
PI meets DB
The FCA’s latest figures for 2017 on PI insurance suggest larger financial advice firms have been able to manage their costs better than smaller firms.
On average, small firms generally paid a higher percentage of their
revenue towards PI insurance premiums than larger firms.
Financial advice firms with revenue under £100,000 paid an average premium of £2,400, which represents around 4 per cent of their average revenue. This compares with just over 1 per cent of revenue for the large firms with revenue of more than £10m.
One large network that did not want to be named says it has had no problem with securing PI insurance, but the increased focus from its insurers on final salary transfers could be affecting smaller firms.
The FCA’s figures for 2017 on PI insurance suggest larger advice firms have been able to manage their costs better than smaller firms
The network says it knows of one adviser who left to become directly authorised, but rang the network’s pension specialist team a few months later to ask if it had PI cover.
He said the quotation he had been given for renewing his PI insurance meant he would have to stop giving advice on transfers.
The anecdote suggests heightened FCA scrutiny on transfers, and the fallout from British Steel has shaken up the market most in the area of insurance premiums and coverage.
Tenet group risk and regulatory director Caroline Bradley says: “We are in a unique position, as we have our own captive insurance company, but certainly the premiums for reinsurance of the upper layers are coming under more pressure.
“We are confident, however, that we will have a competitive PI insurance offering for our appointed representative firms.
“We are not a small network, but I imagine these will be in much the same position as larger advisory firms, and we are aware of a much tougher market on the back of the FCA’s reported findings.”
I am an adviser at the In Partnership network based in Horsham, Sussex. The rule requiring a personal recommendation to transfer has increased my workload, and the network has given advisers a three-month window to get used to the demands of the new regime.
The personal recommendation requirement might make some networks struggle to process the current volume of transfers and make them hesitant to take on more clients.
I am curious about how the FCA guidance on transfers has prompted networks to check their processes and how they are complying with the regulator’s expectations. Different networks may have varying interpretations of the rules, and this might influence how they comply with them.
PI tightening shows networks don’t have all the answers on DB transfers
The issues at British Steel and the greater concentration of the FCA on DB transfers has caused this dilemma for advisers and clients. The pension freedoms have led to more clients needing advice on pensions and this has increased the workload for advisers.
However, directly authorised advisers are finding it hard to renew their professional indemnity insurance. Our organisation’s PI insurance broker has been having a devil of a time getting any insurance to do with pensions.
I know one IFA with 35 years’ experience who has never had a problem, yet is unable to find any insurance cover at all. If directly authorised advisers are experiencing this I imagine networks are having an even harder time.
I know one IFA with 35 years’ experience who has never had a problem, yet is unable to find any insurance cover
Many advisers will now pass a client who wants to leave a final salary scheme to a transfer specialist. But these specialists are also having problems renewing their insurance. That is also true of firms like O&M Pension Advice that announced it will stop offering its pension transfer advisory service.
There is a desperate desire for clients to get perfect advice but this is hard to do, as no adviser can read the future. The FCA and Financial Ombudsman Service seem to be creating a situation where they make it harder for advisers to get PI cover. This in turn makes fewer people able to access advice and it is counterproductive, to put it mildly.
It is important regulators do not draw the wrong conclusions from what happened at British Steel. There are still many good advisers out there.