In May 2011, pensions minister Steve Webb raised concerns about the enhanced transfer value market. The Department for Work and Pensions followed this up by conducting research and concluded there were issues that needed to be addressed.
Rather than imposing a regulatory solution, it was agreed that an industryled code of practice would be a better way forward. After many months, a code was drawn up, the minister signed it off and it was published in early June.
Some of the areas of concern were misleading communications, that the opportunistic timing of communications might drive acceptance (more than usual were sent out when people might be strapped for cash, for example, pre and post-Christmas, and that cash inducements appeared to encourage scheme members to accept the offer whether it was in their best interests or not. A disproportionately large number were also processed as insistent clients.
The code builds protection for the consumer over advice, recognising the value that advisers can add. It consists of seven principles, which include:
1. No cash incentives should be offered that are contingent on the member’s decision to accept the offer
2. For transfer exercises, advice should be provided to the member
3. Communications with members should be fair, clear, unbiased and straightforward
4. Records should be retained by the parties involved so that an audit trail is maintained. When advice is provided, the advisers should record and report on insistent customers to other parties
5. Exercises should allow sufficient time for members to make up their mind with no undue pressure applied
6. Incentive exercises should only be offered to members who are over age 80 on an “opt-in” basis. Advisers should adhere to a vulnerable client policy when providing advice
7. All parties involved in an incentive exercise should ensure they are aware of their roles and responsibilities and act in good faith in the areas over which they have direct control
There has been bad practice in this area and that advice is required in the process has to be good news for consumers and advisers. For advisers, there is the obvious benefit of a potential increase in business and for consumers, particularly those that are vulnerable and may be coerced into accepting an offer, there will be the peace of mind that they are receiving advice on something that they will find difficult to understand alone.
As the code is not statutory, success will depend on the buy-in of all parties involved, including employers. Failure to make this work could result in regulatory intervention so it will benefit the industry to get this right.
The code and practice notes can be downloaded at here
Chris Hannant is policy director at Aifa