Sipp firms are on the defensive right now.
It’s hard to see millions added to the communal compensation pot without asking at least a few questions about how they allowed the most esoteric of investments into their products.
Less has been said of what responsibilities the wider pension provider market might have when accepting defined benefit transfer business.
That changed last month, however, when the FCA wrote to a number of life companies and published an open letter reminding them that, in fact, they actually do have some duties to make sure customers aren’t harmed left, right and centre.
Essentially, it’s reiterating the messages that the FCA has already given to the Sipp market, but applied specifically to DB transfers and product providers more generally.
You need to have ways to ensure failings can be identified. You need to ensure that your processes catch ‘advisers’ without permissions and that all your documentation on DB transfers is appropriate. You need to be able to monitor trends, how your products are being used and that your defined contribution products are fit for DB scheme transfers. You might even want to do a review of business that has gone on since the freedoms and look at how your staff are paid in the context of DB transfers.
None of this sounds too onerous for a major life company. But, on a more cautious reading, it may spark concern for some smaller providers accepting DB transfer business.
The FCA has been clear it does not want to tread on advisers’ toes. It has not suddenly made providers, as opposed to planners, liable for ensuring the suitability of advice. But this has not stopped some providers saying they will no longer accept DB transfer business. To my mind, the letter should not be undue cause for concern, however. While I was initially sceptical of what impact the Mifid II product governance rules, or Prod, would have on the market, this is a clear example of how they can be easily slotted in to meet the DB transfer challenge.
Prod basically looks at a segmentation exercise, asking firms to make sure they have thought about what the target market for their product is and why it is appropriate for them.
In the context of DC providers accepting DB transfers, off the back of the FCA’s letter, they are now in a position to illustrate this.
The charges on my product are not so high that they would erode the kind of investment returns a DB transfer candidate might need, they can say. There are rebalancing mechanisms to avoid harmful market crashes. The customer, who wanted choice over his investments as part of his transfer, is able to see the underlying holdings. The case studies and documents are clear you should go somewhere else if you want really high-risk stuff for an ill-health transfer, say.
Do this, and there’s no reason to fear the letter.
Justin Cash is editor of Money Marketing. Follow him on Twitter @Justin_Cash_1