Robin Nimmo, Strategic Insight Manager at Royal London, looks at the FCA’s response to its latest consultation on pension transfer advice.
What’s in the policy statement?
Standards to be met before giving advice
The FCA has confirmed that:
- A Pension Transfer Specialist (PTS) must hold the level 4 qualification for advising on investments by no later than 1 October 2020 to continue advising on or checking pension transfers from that date.
- The exam standards for the PTS qualification will be updated to take account of changes to the pensions environment. The FCA’s also considering further CPD for existing PTSs on this area in light of the consultation feedback.
The FCA’s still looking at simplifying the definition of ‘pension transfer’ to exclude transfers of non-safeguarded benefits. The consultation feedback has provided them with food for thought, so we can expect changes to the definition in due course.
Preparing to give advice
The pension transfer advice must take account of the proposed destination of the transfer, both proposed scheme and investments in that scheme, if the transfer proceeded.
The FCA’s proceeding with the proposed guidance when two advisers work together on the pension transfer. They need to work together to collect the necessary information, undertake risk profiling and consider the impact of the loss of any safeguarded benefits has on the client’s ability to take on investment risk. Firms who use this advice model should have robust arrangements and processes in place, so that the responsibilities and liabilities of the different advisers are clear.
The rules and guidance for firms advising self-investors are no different. Advisers advising on pension transfers need to take into account the proposed destination of the money. They need to explain to the client the basis of their recommendation including whether the transfer is unsuitable in principle, or whether it is unsuitable because of the proposed destination.
Many advisers operate a triage service as part of their defined benefit transfer advice process. The FCA believes triage can be useful when used appropriately to prevent consumers from paying for advice costs unnecessarily.
They stress however that triage should be limited to providing educational and generic, balanced information on the advantages and disadvantages of a pension transfer. Firms should avoid commenting on whether the consumer should consider a transfer based on their personal circumstances to avoid stepping over the advice boundary.
The FCA’s proceeding with its proposed guidance on how advisers should consider the client’s attitude to transfer risk by considering the key features of both safeguarded and flexible benefit schemes. They should take into account:
- the risks and benefits of the different scheme types
- the client’s attitude to certainty of income over the need for flexibility
- their attitude to and experience of managing investments.
Firms will need to provide a client with a suitability report regardless of whether their advice results in a recommendation to transfer. They’ll also need to provide an advice confirmation for both positive and negative recommendations. This will help clients understand why it may not be in their best interests to transfer while allowing them to proceed on an insistent client basis if the advice isn’t to transfer.
The FCA’s making a change to the inflationary increase assumptions used for valuing defined benefits in the Transfer Value Comparator where minima or maxima apply to such increases. This is to prevent overstating the value of the benefits.
The penultimate section of the policy statement focuses on contingent charging models, with polarised views in favour of and against a ban on contingent charging.
The arguments in favour of a ban see contingent charging as a conflict of interest and overstating the true cost of advice for those consumers proceeding to transfer. Consumers should also pay for the cost of the advice, as in other professions.
The arguments for not banning contingency charging are around the availability of advice in the future, the lack of definitive evidence of a link between contingent charging and unsuitable advice, and that firms would try to find a way to circumvent any ban.
The FCA recognises the complexities and interlinked issues associated with charging for pension transfer advice. They want to carry out further analysis of the issues involved before deciding on whether changes to charging structures are required.
We welcome this latest policy statement from the FCA on pension transfer advice.
Many advisers will already be compliant with the rule changes being made and guidance provided by the FCA, but nevertheless it is beneficial having it formalised in the Handbook. The need for firms to provide a suitability report and advice confirmation in all cases is particularly welcome in educating consumers on why a transfer may not be in their best interests, but still allowing them to proceed with the transfer if they so desire.
It’s good to see the FCA taking time to look fully at the complex issues associated with pension transfer charging, in particular contingent charging. It’s important they reach the right outcome to avoid unintended consequences on that market. This is particularly the case where a customer has no alternative means of paying for the advice where the recommendation is not to transfer.