A lot has been written recently regarding the potential benefits and disadvantages to consumers of the relaxation of the pension rules, including the impact of the change in definition of a pension transfer.
Consumers now have much greater choice when it comes to taking pension benefits or even just moving them from one provider to another. The need for clear advice is growing ever stronger, with some providers insisting on the involvement of an adviser to transact certain “transfers” over and above the minimum requirements set out by statute. However, do adviser firms always know what is best for their clients? And how do they control their advisers to ensure the best course of action is achieved?
Good governance arrangements within firms are, of course, crucial in achieving the best outcomes for clients. These arrangements cover all aspects of the firm’s activities from procedure drafting to training and competence, and recruitment to suitability report writing. Time and time again, however, the FCA finds firms in breach of the standards that have been clearly articulated by it and previous regulators. Pension switching and insistent clients are two areas of weakness.
The then FSA published its guidance on pension switching several years ago and provided a template document that firms could use to demonstrate the suitability of transactions. The FCA has also provided guidance to firms on insistent clients and the steps expected when undertaking switches to Sipps. For example, firms cannot avoid responsibility for the investment into which the client wishes to switch even if the client has simply requested advice on the vehicle to which to transfer.
Similarly, while the insistent client route exists, firms need to be aware the FCA believes the insistent client is the exception rather than the rule. Therefore, firms still need to take the greater consumer wellbeing into account in facilitating a transaction that is against their own advice. Too often these basic checks and balances are missing and too often firms’ systems and controls are being found wanting to both consumer and firm detriment.
Furthermore, with the publication of CP15/30 earlier this month there are a lot more rule changes on the horizon. They include changes to the definitions of “high net worth” and “restricted” investors to ensure lump sum pension withdrawals are not considered to be income. Without this change there is concern many more individuals would, inappropriately, be able to consider themselves to be high net worth or restricted and thereby be exposed to higher risk investments not usually considered to be suitable for retail clients.
The proposed changes also seek to clarify the position regarding advising clients to access pension savings to repay debt with a reminder that such activity is regulated and that pressure to take this course of action is considered to be contrary to treating customers fairly.
Finally, further guidance is proposed to ensure advisers take any pension attachment orders into account when advising clients on the taking of pension benefits. This is considered necessary as, although the client is unlikely to include their ex-spouse or partner, it could be considered a breach of the client best interests requirement to not take the conditions of such an order into account.
The proliferation of consumers wishing to consider the new at retirement options with their pension benefits makes the need for greater controls in these areas ever more acute. Firms should consider undertaking a review of existing governance arrangements to ensure the appropriate controls are in place to manage the risks to customers and the business alike.
Simon Collins is managing director, regulatory, at Eversheds Consulting