The FCA’s radical overhaul of pension transfer qualifications will leave a “dangerous” three-month window following the Budget reforms which could cause consumer detriment, experts warn.
The regulator set out proposed changes to its pension transfer rules in a consultation paper last week which will require advisers to hold the pension transfer specialist qualification in more scenarios. But with the rules not coming into force until June, concerns are growing consumers will be inadequately protected or unable to access advice in the first few months of the pensions freedoms regime.
Through the Pension Schemes Act, the Government is making advice compulsory for those transferring out of a scheme with safeguarded benefits. This will bring transfers from defined benefit to defined contribution schemes under the FCA’s remit.
In last week’s paper, the FCA proposes advice on all transfers from DB to DC schemes will require the pension transfer specialist qualification.
It says previous rules, which stated the qualification was not necessary where the transfer was for the purpose of crystallising benefits, no longer provide “adequate consumer protection”.
The specialist qualification will also be required for advice on transfers from occupational DC schemes without safeguards to personal or stakeholder pensions.
A requirement is being added to the Pension Schemes Act which will make advice compulsory for transfers of pension benefits with a guaranteed annuity rate.
The consultation is open until 15 April, with the rules due to be implemented in June. But the FCA says it has been clear on its “direction of travel” and firms may wish to take the new rules into account from April.
Defaqto wealth management insight consultant Gill Cardy says the timing of the changes is “crazy”.
She says: “The FCA knew the pension reforms were coming but has decided to change the rules with six weeks to go and with the rules coming in three months after the reforms.
“There will be a three-month window which is really dangerous. A lot of damage could be done because there will be people queuing up to get advice from 6 April.
“The FCA can have as much direction of travel as it likes but unless there is a rule preventing it some people are going to fill their boots.”
Independent regulatory consultant Richard Hobbs says: “The Chancellor caught the FCA on the hop with the pension changes and left insufficient time for legislative changes to be made.
“The FCA can’t do everything before 6 April so there is a gap – and advisers who fall into that gap are taking a big risk. Firms without an adviser with the specialist qualification would be prudent to turn business away.”
FCA head of savings, investments and distribution Maggie Craig says the regulator could take action against anyone exploiting the delay in implementing the rules.
She says: “Our consultation is outlining what we plan to do and we would take a very dim view of anyone looking for ways to exploit the period between April and June.
“Consumers will not be unprotected until June because our suitability and treating customers fairly requirements are in place.”
Craig says the FCA did not bring the rules in without consultation because that is “not a power we use lightly”. She says: “We did it for the retirement risk warnings because that was required to deal with a major change whereas for pension transfers what we are doing is extending existing protections, making them tighter and more specific.”
Experts also warn the FCA has seriously underestimated the number of advisers who will need to take the specialist transfer qualification and the sector may be overwhelmed with demand for transfer advice.
The FCA’s cost benefit analysis says there are currently 20,000 transfers taking place each year from DB schemes. It says analysis by the Treasury estimates a further 9,000 customers will want to transfer as a result of the Budget reforms, plus an additional 3,000 to 6,000 who will be tempted to transfer “irrationally”.
The Treasury assumes each of the 35,000 cases will take one day to process and therefore that 175 pension transfer specialists will be needed, assuming each of them works 200 days per year.
The FCA says 75 per cent of cases could be carried out by the 7,000 advisers who already hold the transfer specialist qualification, meaning 45 additional advisers are needed. But experts say the calculations are based on flawed assumptions. They also only take into account the demand for DB to DC transfers and not DC to drawdown transfers, as the FCA says the latter is the result of a change to Treasury legislation so it is not required to include it in the cost benefit analysis.
The majority of pension transfer specialists take the Chartered Insurance Institute’s AF3 qualification. The CII recommends 150 hours of study and holds exams in April and October.
LEBC longevity director Nick Flynn says: “The changes on DC to drawdown transfers will undoubtedly have the biggest impact. To say 45 more specialists will be needed sounds like a typo. From April, most advisers will become pensions advisers because these changes are so important, so several thousand more advisers will need this qualification.”
Delta Financial Management financial planner Jarrod Ellis says: “The assumption that a case will take 7.5 hours is unrealistic. This is a complicated area and the client needs time to make a sensible decision. Each case takes us around 15 to 20 hours.”
Cardy says: “The number of people who have the specialist qualification is absolutely not correlated to the number giving advice. How many of them are paraplanners or not active in the market? The FCA has no way of knowing how much capacity there is in the market and advisers who want to take the qualification cannot do so until October.”
Standard Life head of pensions strategy Jamie Jenkins says interest in DB to DC transfers is likely to exceed the FCA’s estimate.
He says: “There will be a peak of interest pre-April of people who think transfer values look attractive and who have heard about the Budget changes but there will also be a second peak of people who only become aware of the changes after April. The FCA has underestimated demand.”
Craig says the FCA has made a “conservative” estimate as there will be existing capacity in the market.
She says: “We are trying to work out what might happen in the future, which is very difficult for anyone to know at this stage. Can I put my hand on my heart and tell you one year down the line we will see all our estimates were 100 per cent correct? No. But we have to make reasonable estimates and that is what we have done.”
Rule changes at a glance
- All transfers from DB to DC schemes will require the pension transfer specialist qualification. Previously, the qualification was not needed where the transfer was for the purpose of crystallising benefits.
- Advice will be compulsory for transfers of pension benefits with a guaranteed annuity rate although the pension transfer specialist qualification is not needed. Advice is not compulsory for pots worth less than £30,000 or where the benefits are used to buy an annuity.
- Transfers from occupational DC schemes without safeguards to personal or stakeholder pensions are included in the definition of a pension transfer and require a pension transfer specialist qualification.
When the RDR introduced a new level four qualification syllabus, many in the profession, including me, felt the pension paper was too weak. Pension “simplification” had proved to be less than simple. The new pension reforms are making pensions even more complicated and it is obvious the old guidance approach of RU55 is no longer sufficient.
So it is quite appropriate for the FCA to tighten up in this area, otherwise we are going to have advisers who, through ignorance, may give inappropriate advice. It does not mean everybody needs to go out and attain the CII’s AF3 advanced pensions paper but they at least need to work with somebody with that qualification.
I know there will be some advisers who, to meet the RDR requirements, were dragged to the examination hall kicking and screaming and who will now complain they are being forced to upskill again.
But markets change and the pensions arena is getting more complicated so advisers need to be prepared to keep their qualifications up to date for the sake of consumer protection.
Because of the requirement to consult with the market, the FCA is unable to bring in the new requirement from April but as it has made its intention clear about its direction of travel, it is indefensible for any adviser to think: “I have a three-month window to make hay while the sun shines.”
The FCA’s estimate of 45 more advisers needing an advanced qualification sounds very low and that may be the minimum. In practice I would expect hundreds or thousands of advisers to take AF3. If this is a stimulus for more advisers to take the first step towards becoming chartered, then that is a fantastic additional outcome.
Peter Williams is managing director at Williams Goddard Consulting