The pension freedoms promised by Chancellor George Osborne have arrived. With them have come a whole host of issues and dilemmas for advisers. Insistent transfer requests seem to be top of the list. Personal Finance Society chief executive Keith Richards even took the unusual step of writing to the FCA and the Government to highlight the dangers our industry faces.
People keen to access their pension pot but who are in a defined benefit scheme are already seeking to transfer to a defined contribution scheme in order to benefit from the new pension freedoms. There is a real danger this will be against their bost interests and so they are required to seek advice. So far so good. The advice may well be that they should stay where they are and not transfer but they are quite entitled to ignore it. This is where the problems start to build up.
A person who has been warned not to proceed with a transfer can approach a provider and press the buttons to go ahead anyway. I have to ask myself why this is permitted. Surely if we trust our advice community in the post-RDR, non-commission-biased advice world then why would we allow an individual to go against that advice?
We are where we are, as they say. So we now have the situation where an adviser is faced with an ethical and professional dilemma: how to deal with an insistent transfer client. Having given the advice not to transfer, an adviser might be asked by the client to provide an administration service to facilitate the transfer. How should the adviser respond? There is an ethical question about helping a client to go against the advice that has already been given. That aside, there is the practical question of liability for the adviser if they do go ahead. From past experience, we know both FOS and FCA will be unsupportive of advisers if the client subsequently complains. I have spoken to some who have asked about disclaimer letters and whether their use would protect them from liability. My response has been to point out that a client who has no financial services qualifications is almost certainly unable to sign a disclaimer that says they knew what they were doing.
More importantly, the adviser would be expected to know that the client was not qualified to sign that letter. We saw similar situations with “experienced investor” disclaimers on sales of unregulated collective investment schemes. If the insistent transfer request comes from a valued client then the advice firm could find a loss of ongoing adviser charging if the client feels let down and moves their business away.
So let us assume the adviser decides to step back completely and disavow future involvement having advised the person not to transfer. Off they trot to the provider where they are welcomed with open arms. This surely places at least a moral responsibility on the provider to ask what advice the client received. Will providers turn potential transfers away? If not, they are unlikely to face complaints in the future since they have not been the ones giving advice. After five years of austerity and pulling the belt in, there will be more than a few people looking to access their pension savings. Many might be left with poorer retirements as a consequence.
Pension freedoms, then, create a situation where an investor can insist on doing the wrong thing, on acting against their own self-interest. Advisers must do what is right for the client and potentially lose money; providers can accept a client when perhaps they should not, though they then make money.
The adviser forums are filled with posts on this issue. Some argue the providers should not accept these insistent transfers; some argue the adviser should be able to deal with such clients using a disclaimer. The industry has debated simplified advice models and other solutions. Surely there is a more fundamental concern: why is our regulator allowing this to happen at all? How can we allow people to ignore professional advice warnings and run headlong towards a financial cliff? The FCA continually warns it is worried about poor outcomes for investors. Surely it should be far more vocal in its opposition to what may be the biggest cause of them for a generation?
Richard Leeson is chief executive officer of Adviser Advocate