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FCA letter on DB transfers causes confusion among providers

Steven Cameron

A letter the watchdog sent to product providers last week about their defined benefit transfer procedures has inspired a number of conflicting interpretations, Money Marketing can reveal.

In a Dear CEO Letter sent to the heads of major providers, the FCA lays out how providers should treat customers fairly in the context of DB to defined contribution transfers.

It explained the watchdog has now completed its review of pension product providers and identified the key drivers of harm in the market.

The letter went on to say what product providers need to consider when designing, marketing and providing pension products.

Specifically it says product providers should identify negative trends, such as a high volume of transfers from a single scheme over a short period or customers transferring out of new DC arrangements soon after transferring from DB schemes.

Furthermore it adds: “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.”

Yesterday in response to the letter Sipp provider Intelligent Money announced it was pulling out of the market and it would no longer accept DB transfers.

Money Marketing spoke to a number of other product providers who say they are not pulling out of the market but have raised concerns about the implications of the letter and want further clarity from the FCA about it.

Intelligent Money chief executive Julian Penniston-Hill says: “I was absolutely shocked by the possible legal interpretation of the letter and I called a board meeting over the weekend in light of it.

“The conclusion of that board meeting was this is a change in direction from the FCA. The letter affects platforms that have their own pension or Sipps, life insurers, discretionary fund managers and Sipp providers.”

He adds: “Where providers were quite rightly responsible for suitability of investments (for a pension scheme), the Dear CEO letter extends responsibility for the suitability of the advice itself. Quite obviously no provider is going to take on any liability for advice given by unconnected third-party financial advisers.

“In such a scenario, providers would have no alternative but to cease accepting business due to the liability that arose from [unconnected and/or third party] external financial advisers. This could be the end of independent financial advice.”

Novia chief executive Bill Vasilieff says he disagrees the FCA is asking product providers to be responsible for the suitability of advice but he understands the interpretation.

He says: “One of the things that is causing concern right now is people who never had money are suddenly getting it through pension freedoms and are making bad decisions through introducers. But that is not to say all DB transfers are bad.

“We will continue to accept transfers and we think transfers are attractive and that has not changed.”

Reacting to the letter Aegon pensions director Steven Cameron adds: “The FCA has already provided extensive rules and guidance to advisers and is now looking at the role of providers.

“Some of the Dear CEO letter rearticulates broader provider responsibilities with a particular focus on DB transfers. However, there are other aspects where the FCA looks to be expecting more from providers.

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

The FCA was not able to comment in time for publication.

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. “The conclusion of that board meeting was this is a change in direction from the FCA. The letter effects platforms that have their own pension or Sipps, life insurers, discretionary fund managers and Sipp providers.”

    ..effects… or …affects….

  2. “Clear, fair and not misleading”

    Regulation by example?

  3. This is looks like nothing short of a foundation laying exercise which will retrospectively be applied in order to generate compensation payments.

    It usually is.

    And they say this is a capitalist country. Not many signs of that left these days.

  4. I have been thinking about this a little more because it really troubles me.

    Let’s get some posts in the ground first. The FCA isn’t very good at its job – maybe no other outfit could do better, but it is increasingly slow on its feet, internally bureaucratic, and appears incapable of any sort of foresight. So, four years after pension freedoms, it has finally woken up to the DB transfer problem.

    This is far too late and much damage has been done. The FCA are secretly embarrassed and, as usual, want to put it right with OPM.

    Small IFAs cannot afford it so their cost will fall on the FSCS. Their PI won’t pay and in both cases the limits are too small to repair the damage.

    So? Crank up the FOS limits: tick. Crank up the FSCS: under discussion. But then what? Find the deep pockets – blame the providers: tick.

    But realistically, can providers afford to foot this, yet another, bill for a problem not of their own making? And what are the impacts? What you are about to see unfold before you is how dysfunctional the regulatory thinking is these days.

    So, back at PRA HQ, they are demanding high capital requirements for annuity business under Solvency II. Any concessions given in the past during the switch to SII are being eroded (viz EqRel Mortgages) making this business more costly in terms of capital than ever.

    Now, part of the pension freedoms problems are that people that should still annuitise, are not doing so – too expensive – partly because of the capital requirements and partly because the PRA’s boss – Mark Carney bought all the bonds. All coherently incoherent so far. The unforeseen effects of regulatory action.

    Now DB transfers would not be expected to be used to buy annuities – but compensating them by reinstating guaranteed incomes certainly will be. So the FCA will, with the call for compensation, be calling for the life companies to pay for and to underwrite annuities, on terms made more expensive by the FCA’s mates and all at a time when the FCA’s mates want life companies to put up more capital, while the FCA is happily spending it for them on compensation.

    Entirely circular. Which sane shareholder would be writing a cheque out to provide support capital to keep one regulator happy, only for the other one to be spending it, on the very product the first regulator doesn’t want you to write. The shareholder will need to exact a heavy price for that sort of capital, and you really do fear for the viability of insurers.

    Now the scale of this might be tiny, but one whiff of a free reset button and this will mushroom. DB transfers out to all schemes in 17/18 – £14.3Bn. Four years of pensions freedoms. Two thirds are to DC schemes. Level of damage done 30%. Total potential cost £11.5bn. Given the guessiness of the number, it might be on the high side.I think its rather low. But, either way, it’s a whopper whatever.

    • You have just articulated what I am thinking. Now one has to wonder why you and I think this when I am a small firm with two full time and two part-time staff including me and one other new adviser (my son). Why aren’t the FCA thinking this might be the case/happen? If they aren’t are they incompetent or is this what they want?

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