Putting the right people off transferring at the outset will be hugely valuable to the industry but there are issues to address
A combination of pension freedoms and the economic circumstances giving rise to historically high transfer values has created a perfect storm in terms of demand for defined benefit transfer advice.
Sadly, it has also led to the inevitable scandals that accompany such a situation. With such high sums involved, a small minority of advisers have been taking advantage, looking to make a fast buck with little regard for the long-term misery that may result.
But leaving that aside – and not dwelling on the fact this huge increase in demand and the problems that come with it could largely have been predicted and pre-emptive changes to advice rules and guidance put in place – it is a positive to see the FCA is looking once again at how to improve the quality of advice available.
Its recent consultation paper, CP18/7: Improving the quality of pension transfer advice, contains many sensible recommendations. I was particularly interested in the section on triage services.
Given the FCA’s assumption that most consumers will be better off not transferring, there must be value in focusing on providing a high-quality triage service which will stop a significant number of consumers from considering the move.
Even if firms do not agree with the FCA’s starting assumption, it is not going away. And while it may sound a little “nanny state”, in the current regulatory climate, putting the right people off transferring to start with and leaving the market to serve those who may have genuine reasons to consider a transfer is something that warrants serious consideration.
A good and widely available triage service could perform a very valuable function. But there are two key issues: where is the advice boundary and are firms supposed to charge for such a service or provide it at their own cost?
The FCA has sought to address the first issue with some guidance that is useful as far as it goes. Without wanting to be too mischievous, I do wonder whether it would regard a clear statement at the outset of a triage service that “Most consumers will be best advised to keep them [safeguarded benefits]” as crossing the advice boundary.
Ok, probably not, but it is not far off. It seems from the guidance that refusing to provide advice following the triage service will be the best, and most compliant, method of indicating someone should probably not transfer.
The bigger issue is how a firm could ever make this sort of triage service pay. Consumers still do not seem to appreciate the value of advice, even for such life-changing decisions, so are unlikely to want to pay for it.
That said, the FCA clearly expects these triage services to be case specific and so a degree of work and risk is involved in providing them, even if no actual advice is given. This issue is not addressed at all and so the dilemma will persist.
The triage service may be one area well suited to more prescriptive rules by the regulator. It is a sad thing to say, but a widely available triage service could take a swathe of consumers out of the market for advice and reduce the opportunity for unsuitable advice to be given.
Usually, more prescriptive rules are not popular, but this could be a compelling case for them. It also links in to the real issue: lack of consumer understanding and education.
Some of the comments around “free money” made to the FCA from those who have accessed their pensions under the freedoms show the real lack of understanding by the average person on these matters.
With this in mind, there must also be a place for a long-term programme of financial education. A prescriptive triage service would only address the short-term symptom, not the cause, so better understanding is a priority to reduce the consumer population’s exposure to bad advice.
Unfortunately, however, political short-termism does not lend itself to such long-term solutions.
Alan Hughes is partner at Foot Anstey LLP