What is top of the priorities list for the woman charged with supervising the roughly 25,000 advisers in the UK? The answer – defined benefit pension transfers – is unlikely to surprise.
“Its front and centre in my mind,” FCA supervision head Megan Butler says. “The particular challenges around DB to DC pensions are taking up a great deal of my time and my team’s time. Rightly so, and it is possibly the greatest area of conversation that I’m having with the advice industry.”
Sitting down with Money Marketing last week, Butler’s workload seems large enough to warrant some definitive prioritisation. The implementation of Mifid II is just five weeks away, and the regulator has just finished two other major pieces of advice market work on reforming the Financial Services Compensation Scheme and the suitability of advice.
The proportion of suitable findings in that review, over 90 per cent, is a big plus for Butler. However, the follow-up on DB transfers, which found just half were suitable, is less positive. Even worse, this figure drops to 35 per cent when looking at the final product choice.
She notes that advisers are taking steps to rectify the problems though.
She says: “In any of my conversations, whether I’m standing on a conference platform or having a conversation around a table or on a one-to-one basis, this isn’t an area where people are pushing back. This is an area of, can we understand what our responsibilities are, understand what you are seeing as the failures, so that we can check against our own arrangements.
“When we have done firm-specific work, and in a number of firms where we found things not quite where they should be, the firms themselves have chosen to stop. That’s a very healthy sign. Actually, when these issues are called out, the industry is challenging itself.”
The engagement is stretching to a host of industry events the FCA is hosting for advisers specifically on DB transfers, including one in Swansea earlier in November, which saw more than 100 attend.
Butler says: “That’s not just us lecturing the industry. That’s actually a much more open dialogue about the challenges we see, the risk advisers may be running, the things that they should be thinking about and then encouraging them to talk to each other about how they are managing the issues.”
The quest for better DB transfer advice is far from over. Alongside its outreach events, the FCA is going to continue to review the market, with firm visits and file reviews in the pipeline. The FCA originally looked at 92 firms that had done a particularly large amount of DB transfer business for its first review. How wide will the new sample be? It’s “a work in progress,” says Butler.
The FCA’s work on DB transfers: Key stats
2 years: The FCA has been reviewing the market
22 firms: Number asked for detailed information
12 firms: Visited afterwards
4 firms: Chose to stop advising on transfers
47 per cent: DB transfers found to be suitable
35 per cent: Of recommended products were suitable
But she does encourage firms to come forward to report those where poor practices may be going on while the FCA continues its investigations. This should go beyond anecdotes, providing names and details that would allow the FCA to take action, she says.
“One of the great things coming through our seminars and more broadly is we are saying we hear lots and lots of noise and so will you, non-specific anecdotes about bad introducers and bad firms. What we are saying is bring it to us, make it specific and we can take action.
“We have whistleblowers, we have complaints, we have a very rich source of data that allows us to focus our activity and that is what I would encourage the industry to do, because it’s in the industry’s overwhelming best interest we act to improve the firms who get it wrong because they don’t understand. There’s a population in that category but there’s also a population who aren’t interested in getting this right. The better intel we can have, the faster action we can take to take them out of the industry.”
The FCA has highlighted particular risks of using unregulated introducers to facilitate transfers. For example, it has found that some advisers were making recommendations without actually knowing where the money would end up because of the introducer’s involvement, and cases where some introducers have used an authorised advisers’ details to elicit client information they had no right to. Again, this is where advisers can step in and help.
Butler says: “This is not just a story about the regulated advisers. The unregulated introducers are a source of potential harm and risk to the advisers that take business from them. But again, if there are unscrupulous introducers out there overstepping the line into advice tell us and we will do something about it.”
The quality of advisers’ disclosure continues to be a concern for the regulator, both across the piece and in relation to DB transfers specifically.
Over 40 per cent of advisers failed on disclosure in the FCA’s wider review. But does this really take the shine off the suitability scores if the outcomes were so good in the end?
“You do need both together,” Butler says. “Suitability is great, fabulous, and overwhelmingly important but it cannot come at the cost of appropriate disclosure.
“Clients need to understand the decision they are taking and the fact is they are influencing the recommendations that are being made to them so they can exercise their choice in an appropriate way. So an adviser can be giving the most suitable, most fabulous piece of bespoke advice entirely focused on the particular nuances of the person sitting opposite them and their particular needs and position but the client needs to understand all aspects of that and the implications of that across the piece.”
The links in the chain
The ability of the client to judge value for money is a key theme for much of the regulator’s work, running through its asset management market study. In the review, the regulator has outlined a number of reforms for fund managers, such as disclosing charges in an all-in fee and having more independent representation on boards. But as the focus moves on to competition between platforms, advisers will also be subject to scrutiny. The shape of this will depend on what the FCA finds when it reviews platforms.
Megan Butler‘s CV
2016 – FCA director of supervision for investment, wholesale and specialists
2015 – Temporary FCA post as head of supervision for wholesale and specialist investment
2014 – PRA executive director of international banks directorate
2008 – Made FSA head of department for UK investment bank supervision
2000 – Joins Financial Services Authority
1987 – Called to bar as a barrister
Butler notes that the FCA must be careful not to ring in too many changes too quickly, particularly as Mifid II looms.
She says: “With each of these we have to be very careful that we don’t duplicate remedies, that we understand the impact of the changes we are making before we put anything else into the system. This adviser continuum through to the asset management world is going through a lot of change. Some of it is being pushed by regulators but a lot of it is being pushed by business change. In all these things we have to be measured, proportionate and assess the impact of each step.”
Advisers within vertically integrated firms – those that also own fund managers and/or platforms – may have the most to fear about the impact of their structures on competition and value. Though the situation is not as simple as in-house fund flows resulting in conflicts once they breach a certain level, Butler says advisers should be asking questions and challenging the reasons behind them.
She says: “In all these things, most of the changes we are putting in through the market study are about pushing the firms to ask themselves these questions, so they don’t come from us, so they are not a compliance issue. I tend to think if you look at these things from a compliance perspective you will fail. You need to be thinking about it with a broader, best interest of clients mindset, which is in your best interests at the end of the day, because I firmly believe that good quality client outcomes are the best thing for the business.”
Either way, disclosure of those relationships will be key.
Butler says: “It’s perfectly capable of being disclosed without the Yellow Pages being slammed on the desk which doesn’t help anyone. This is possibly what separates the good advisers from the less good; turning this into words their client can understand.”