I have worked in retail financial services for the last 30 years, from the coal face as an IFA to the back office as head of compliance or technical services.
Throughout this time, I have always believed the UK should follow the American Securities and Exchange Commission model of regulating products alongside the advice provided.
With regulation in the UK simply based upon the advice provided, we read last week that the FCA has spent many hours looking at adviser’s client files where defined benefit transfers are involved.
Over the last two years, it has reviewed “detailed information” from 22 firms on their DB transfers, with 13 (a tiny percentage of the circa 15,600 the FCA regulates) providing client files after its initial analysis.
Of the 88 cases included in the findings, just 47 per cent of the recommendations to transfer were deemed suitable. Suitability was unclear in 36 per cent of cases, while 17 per cent were ruled unsuitable.
As for the FCA’s view on the suitability of the recommended product, it found 35 per cent were suitable, 40 per cent was unclear and 24 per cent unsuitable.
The FCA staff that visit advice firms tend to be bright young things that have recently graduated and who work long hours. Most of them could not financial plan their way out of a paper bag. The FCA says there was not enough fact finding and calculating of the risk the client wanted to take. Did those assessing the transfer files consider the following?
There are 11 million people in the UK relying on 5,800 DB pension schemes to provide their income in retirement. According to the Pensions and Lifetime Savings Association, many employer covenants are under pressure and 3 million members in the weakest schemes only have a 50:50 chance of receiving their full benefits in the future.
Meanwhile, the DB schemes deficit level stands at £460bn, with little hope of reducing in the short term.
With high stock valuations, historically low bond yields, the uncertainty around Brexit and political instability, DB scheme members have an opportunity to consider, with the help of regulated advice, as to whether to take the sky high, forty-times cash equivalent transfer values.
The opportunity to transfer at such huge multiples may never be seen again in my lifetime once bond yields rise. Add to these economic factors the needs beyond the transfer value, such as the wish to leave money to dependents and minimising tax, all of which adds to the attractiveness.
Is advising on DB transfers the same as to kill the goose that laid the golden egg? I think not. If the money taken is advised upon for a lifetime, with adjusted risk profiling and cash flow calculations, this may be the best outcome for the majority of the millions of DB scheme members for the next 30 years. As long as the FCA clamps down on bad products.
Kim North is managing director at Technology & Technical