As the FCA prepares to deliver a hotly anticipated set of proposals for fixing defined benefit transfers, IFAs are hoping it will finally give clarity on exactly how they should approach the market.
By the end of the month, financial planners will know whether the regulator will have followed through on five ideas outlined last June. These would include updating its handbook to make the role of pension transfer specialists clearer and giving a prescribed format for a new standard of transfer analysis.
A consensus is emerging that the regulator is unlikely to do something as dramatic as ban contingent charging outright, limit charges and introducer fees or reform adviser qualifications on transfers. The FCA’s policy statement is likely to implement many of the ideas outlined in its previous consultations. The mandatory advice threshold of £30,000 for safeguarded benefits is not part of the FCA’s remit and is likely to remain unchanged.
However, advisers and commentators differ on where they would like the FCA to focus most of its attention and resources. Money Marketing has lined up the options on the table ahead of the flagship paper.
Dunstan Thomas’ director of retirement strategy Adrian Boulding believes the FCA will demand advisers do more to help clients understand transfers. He says: “It will want evidence that advisers have discussed the implications of taking a DB transfer with clients, and that clients understand they are swapping a lifelong secure income for a lifetime of managing their own pot of cash.
“The FCA wants to see a greater personal involvement from advisers, with less reliance on outsourced services.”
Boulding adds the FCA is also going to insist that the adequacy of the transfer value and how the cash received will be invested are considered together and not separately. Therefore it will expect new and much more comprehensive tools to be developed to assist advisers in this field.
Boulding says: “In particular, the tools advisers use will need to look at how the transfer will be managed throughout life, so including the growth phase, the de-risking phase, income drawdown and eventual annuity purchase in later retirement.
“I foresee many more advisers using their new tools face to face in front of clients, and much less of advisers handing over a pre-prepared transfer report.”
Former regulator turned consultant Rory Percival says the FCA will not do anything radical as it tries to balance the needs of different parties on transfers.
He says: “The FCA is walking a fine line between having rules that are effective in protecting consumers, but don’t mean the advisers or professional indemnity insurers shut up shop and stop providing advice or adding excessive cost to providing advice.”
He believes introducing limits on charges and introducer fees or reforms to adviser qualifications on transfers would appear too heavy-handed.
However, Percival believes the policy statement will touch on issues not raised in the consultation, such as triage, contingent charging and outsourcing.
Nonetheless, there are experts such as Royal London director of policy Steve Webb who worry that political pressure could force the FCA into a misguided intervention.
He says: “There’s no reason to think that the FCA will have fundamentally changed its view since last summer, but they will have come under pressure from the work and pensions select committee report based on the experience of the British Steel situation.
“While I agree that there are lessons to be learned from what happened in South Wales and beyond, there’s a real risk of drawing general questions from a very specific combination of circumstances.”
Webb points out that usually, if an individual is considering a transfer, he will be able to seek out a suitably qualified adviser, will have some time to make a well-informed decision, and will probably not encounter an unregulated adviser.
This was not the case with British Steel, where a tight deadline on transfers put pressure on members to choose one of three options: stay in the old scheme that is going into the Pension Protection Fund; transfer into a new British Steel scheme or transfer out completely.
Furthermore, a lack of capacity by the scheme to process the volume of enquiries, huge changes in the size of the transfer values offered from month to month and demand for advice in a geographically concentrated area meant all the suitably qualified local advisers were overwhelmed.
All these factors created the potential for unscrupulous players to come in, including unregulated introducers to try and make money.
Webb adds: “In short, very few of the factors that caused problems at British Steel would be present more generally, so the FCA may be reluctant to fundamentally change its position in light of those events.
“My expectation is that the FCA’s final rules will be broadly in line with their initial recommendations, and I would be very surprised to see any new rules on qualifications.
“There might be a clampdown on unregulated introducers, and there will no doubt be a strong reiteration of the basics of what makes for good advice.”
Staying the course
Standard Life head of financial planning propositions Alastair Black hopes the FCA will not depart from the proposals in the consultation and says: “We have always been supportive of the FCA consultation and I hope it will basically implement the bulk of what is in the consultation.
“One thing the consultation talked about was the transfer value comparator. That’s the only part of the consultation where advisers told us they were confused about how the comparator tool should be used. They want clarity and if the FCA can give them that it would be helpful.”
Threesixty managing director Russell Facer also expects the shift from the critical yield to transfer value comparator will materialise.
However, Facer also wants more help for savers with small pots as they do not usually have access to advice. He says: “A service like Money Alive would be really valuable as we need members to think carefully about transfers and be getting some type of guidance.”
Aegon pensions director Steven Cameron says some advisers are already ahead of the game when it comes to rolling out what the regulator sees as good practice.
He says: “Some firms will already be incorporating many of the proposed new aspects into their current advice processes, and for them, the new guidance will be an endorsement.
“Others not active in this market may wish to reconsider their position once the new approach is published. Recent Aegon research showed advisers expect a big increase in demand from clients here.
“The new guidance is also likely to include FCA expectations where firms work with separate transfer specialists.”
Guidance from the FCA on transfers is clearly needed as the pension freedoms approach their third anniversary and the advice profession attempts to weigh the fallout from British Steel.
A lot of advisers and experts believe the FCA’s consultation proposals are sensible, and if the FCA follows through on them then many will breathe a sigh of relief.
The FCA declined to comment on what might be included in the
Jarrod Ellis, adviser, Delta Financial Management
All recommendations must be personalised. The old model of relating to an annuity purchase is flawed and the idea that clients will use drawdown and pension freedoms should be factored in.
Simple projections explaining at what age the funds could be extinguished must be outlined. For example, if the pension grows at 4 per cent and an income equivalent to the defined benefit scheme is taken, the fund would run out at age X. Detailed analysis of what is being given up should be outlined. How would the DB pension have increased in deferment, how would it increase in payment?
A target return for the portfolio must be redefined and must dovetail with the client’s attitude to risk. The client must realise they are giving up certainty and security for the flexibility and control of a defined contribution scheme and must share responsibility for the risks.
Kate Shaw, planning director, Financial Life
Transfer value analysis is only a small part of the transfer process and there is too much focus on it. If transferring is right, then the critical yield is irrelevant. We as a profession need to move away from regarding critical yield as the linchpin of advice. It is part of the administration process for a transfer but no more than that.
Also, I am not convinced changing the exam structure on transfers is a good thing. On the one hand the FCA is narrowing the qualification standard and on the other hand wants to broaden the way advice on transfers is given. That appears to be counter-intuitive.
I agree advisers should be all looking at the member’s circumstances in a transfer, but I think many of us who sat G60 and AF3 exams in the past at level six have a more comprehensive level of education. AF3 is a broader syllabus than AF7 as it is not just focused on DB transfers.
What the FCA has proposed on DB transfers
- Introduce a rule to require all advice on the conversion or transfer of safeguarded benefits to result in a personal recommendation
- Update and add to FCA handbook guidance on assessing suitability when giving a personal recommendation to convert or transfer safeguarded benefits
- Introduce FCA handbook guidance on the role of a pension transfer specialist, and amend the definition of a pension transfer specialist
- Replace the current transfer value analysis requirement with a requirement to undertake analysis of the client’s options, including a prescribed comparator indicating the value of the benefits being given up
- For advice on an opt out from a DB scheme where there is no chance of accruing additional safeguard benefits, then an adviser does not need to follow additional rules proposed in the paper
Source: CP17/16: Advising on pension transfers
TCC associate director David Boyhan
With the continued demand from clients for pension transfer advice and the Parliamentary focus on this area, the advice sector is eagerly awaiting the FCA’s policy statement. The policy statement is due later this month, and with the wide-ranging consultation paper released in June 2017, there continues to be speculation on what the key areas of focus will be.
Without question, a key area of focus will be the additional guidance on assessing suitability. The FCA’s recent review of pension transfer advice indicated that less than 50 per cent of the advice reviewed was suitable. This compares poorly to the FCA’s wider reaching suitability review in 2016, which showed 93 per cent of advice to clients is suitable.
Therefore, the FCA will be keen to ensure that its additional guidance will enhance the standard of advice in this area. This should include the important role the safeguarded benefits play in providing a retirement income for clients. The FCA has made clear in its consultation paper that the relevant wider circumstances of the client need to be considered in the advice process, however, it will be interesting to see what specific examples the FCA gives in addition to health, death benefits and tax.
Historically, home purchase has been a customer’s biggest financial decision. However, with the large transfer values being offered at present, the decision whether to transfer safeguarded benefits may now be the biggest financial decision they have to make.
Of course, good advice in this area can result in excellent customer outcomes, but poor advice can result in significantly less retirement income.
As well as the additional guidance on assessing suitability, it will be important to have a clear understanding of any new requirements placed on pension transfer specialists. These specialists play a crucial role in ensuring clients receive suitable advice, so firms will need to ensure they are meeting regulatory standards when giving or signing-off advice.
Pension transfers can provide excellent outcomes for clients, but are highly complex. It’s an area where advice firms have struggled in the past and which has resulted in customer harm.
Therefore, it’s vital that firms read the FCA’s policy statement as soon as it is released and make any necessary changes to meet the FCA’s expectations and ensure customers receive good outcomes.