The FCA has set out its expectations for advisers carrying out pension transfers amid fresh concerns over suitability.
In its latest guidance, published today, the regulator warns conducting pension transfers based solely on a generalised critical yield calculation will not meet their requirements.
The FCA says it expects the likely expected returns on the new investments would need to be looked at in relation to the critical yield, as well as the personal circumstances of the client.
The specific receiving scheme also needs to be considered, including for overseas schemes where UK IFAs should liase with an overseas adviser where necessary.
The FCA says: “We are aware that some firms have been advising on pension transfers or switches without considering the assets in which their client’s funds will be invested. We are concerned that consumers receiving this advice are at risk of transferring into unsuitable investments or – worse – being scammed.
“Transferring pension benefits is usually irreversible. The merits or otherwise of the transfer may only become apparent years into the future. So it is particularly important that firms advising on pension transfers ensure that their clients understand fully the implications of a proposed transfer before deciding whether or not to proceed.”
The regulator stopped short of forbidding advisers from facilitating transactions from so-called “insistent clients”, who want to act against an adviser’s recommendation, so long as the advice is suitable for the individual, the risks and costs are laid out, and it is made clear to the client that their actions go against the advice given.
The regulator has also reiterated its previous advice that advisers cannot outsource responsibility for pension transfer advice.
The guidance says: “A firm without the permission may refer a client needing pension transfer advice to a firm with the permission. However, it is not acceptable for that second firm to claim to be advising on the pension transfer without taking into account the assets in which the client’s funds will be invested as well as the specific receiving scheme.”
The FCA also reminded firms that while individuals who are not pension transfer specialists can advise on transfers, this advice must be checked by a specialist.
Evestor advisory services director director Rohan Sivajoti welcomes the clarification from the FCA and says it hinted at concerns over criminal activity creeping into the pension transfer space.
He says: “It’s not often the FCA sends round notes like this on specific areas directly to my inbox.
“The fact that the second sentence mentions the word ‘scammed’ and is front and centre of their communication does make one think that there could have been a rise in criminal activity surrounding this area. The communication itself is very helpful and is a prudent reminder to advisers that this is very much an area which one must approach with expertise, clarity and a careful nature.”