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FCA warns on Sipps and ETV transfers

The FCA has given a warning to advisers over enhanced value pension transfers after it found poor advice had been given in a third of cases.

The regulator has also written to all Sipp operator chief executives after its third thematic review of the sector found that failings remained “widespread”.

Its thematic review of bulk pension transfers from defined benefit to defined contribution schemes, published this week, found that unsuitable advice has led to a risk of consumers losing out on retirement income.

The review looked at 300 bulk transfer advice cases between 2008 and 2012 in which savers were offered an increase in their pension transfer value, including in some cases a cash payment, to encourage them to leave their employer’s defined benefit scheme.

It identified poor advice in a third of cases, including generic templates that were not tailored to members’ circumstances, fund recommendations that did not match the risk profile of the member and the use of default receiving schemes with uncompetitive charging structures.

The regulator also found instances of advice where the outcome focused solely on critical yield analysis, and where firms failed to adequately establish the level of risk a member was willing and able to take.

The FCA will discuss its concerns with individual advice firms, asking them to contact members and offer redress where appropriate.

FCA director of supervision Clive Adamson says: “It is disappointing that our review saw failings in the advice given.

“All firms active in this complex area of pension transfer activity should think very carefully about the quality of the advice process and assurance framework required to deliver fair customer outcomes.”

The FCA says in view of the pension reforms due to take effect from next April and the Government’s decision not to ban transfers from defined benefit to defined contribution schemes, there is a “heightened risk” of unsuitable transfers.

The regulator has also published the findings of its third thematic review of the Sipp sector.

The review found that, despite recent warnings, a “significant number” of Sipp operators are still failing to carry out appropriate due diligence on non-standard investments and comply with prudential rules.

In a Dear CEO letter to firms, Adamson asks chief executives to review their business and take action in light of the findings.

The review found most Sipp operators failed to undertake adequate due diligence on high-risk, speculative and non-standard investments.

The regulator says since the last review of Sipp operators there has been an increase in the number of opaque investment structures, such as special purpose vehicles and limited companies, created to pool investment money and finance other businesses.

It found firms had difficulty establishing where money was being sent and whether underlying investment propositions were genuine.

The FCA says: “We found that most firms do not have the expertise or resources to assess this type of business but were still allowing transactions to go ahead.

“This increases the risk that a pension scheme may become a vehicle for high-risk and speculative investments that are not secure assets, many of which could be scams. It is not acceptable for firms to put consumers at risk this way.”

The FCA also says firms are continuing to rely on marketing and promotional material produced by investment providers as part of their due diligence, despite previous guidance highlighting the need for independent assessments.

Many Sipp operators were found to be in breach of prudential rules, including a number operating in breach of minimum capital requirements.

The FCA says: “Many of the firms we assessed were unable to identify the correct prudential rules that applied to their business and we found a general lack of understanding of prudential requirements among senior management.”

The FCA says it has already forced several firms to limit their business as part of the thematic review. The regulator is also referring two individuals at separate Sipp operators for enforcement action as a result of the review.

It says it will visit more firms over the coming months and expects to see “significant improvements”.

ETV transfers: Good and bad practice

Good practice

  • The adviser was remunerated for the work undertaken, regardless of the outcome
  • The advice covered members’ existing pension arrangements
  • The employer’s communications made it clear that advice should be taken before making a decision on the offer
  • Members were given sufficient time to consider the offer and take advice

Bad practice

  • The adviser’s fee structure incentivised making recommendations to transfer (for example, the fee was linked to 250 members transferring)
  • The employer’s communications allowed the member to engage in the offer before taking advice
  • The offer included statements that may have put members under pressure to make quick decisions by, for example, indicating limited employer finances to fund the offer
  • Risk descriptions used highly subjective or vague terminology, for example, “happy” to take on investment risk or “willing” to take on investment risk


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