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What do suitability reports tell us about DB transfer advice?

Compliance experts have urged advisers to improve their report writing for defined benefit transfers in the wake of heightened regulatory scrutiny.

The FCA has expressed suitability concerns on several occasions in recent months, many of them garnered from the final reports produced by advisers recommending a transfer to their clients.

When it comes to the British Steel transfers, for example, some clients have reported being unaware that their funds were being placed in an algorithmic fund solution, and suitability reports failed to properly document the risks involved.

Advisers have also raised a number of examples where rogue IFAs taking business from introducers are accepting “cut and paste” recommendation letters or failing to disclose the full extent of ongoing charges.

However, there are also examples of IFAs going to great lengths to ensure personalised reports are read and understood by the client. Money Marketing has canvassed a number of regulatory experts for indications of good and bad practice as transfers continue apace.

Getting the best guidance

While it has discussed good and bad practice in a broad sense, the FCA has been criticised for failing to provide example reports, templates or rules of thumb to help advisers gauge what a perfect suitability report for a DB transfer should look like.

Among the failings it has documented, it has reminded companies to make clear what safeguarded benefits are being given up and the risks of transferring, including investment and longevity risk.

When it comes to insistent clients, the FCA has also said advisers should include clear statements that the actions are against advice in their report. A recommendation could well be suitable but the report so poorly constructed that it does not reflect this, leaving the advice firm vulnerable in the event of a complaint.

Thirty-six per cent of the DB transfers that the FCA reviewed were branded “unclear”, meaning that it did not have enough information to tell whether or not they were suitable, and 17 per cent did not stand up to the regulator’s test.

Zero Support managing director Phil Young has seen a wide variety of suitability reports ranging from good to bad. The poor reports are a classic example of volume sales with predetermined outcomes using a template with just the client’s name and a tweaked address. The documents are often long, non-personalised and contain irrelevant facts.

He says: “A good example is putting words in the client’s mouth which clearly never came from them, such as ‘you said would like the comfort of using a discretionary fund manager with tactical asset allocation’ for the investment solution. For DB transfers the preferential death benefits are likely to be a big cut-and-paste exercise for some.”

How short can you make a suitability report?

Young thinks such a cut-and-paste approach is risky, as DB transfers are more likely to trigger complaints, and advisers should behave accordingly. He adds: “You would expect advisers to be at their very best when documenting the advice, in addition to the quality of advice itself.

“The quality of the report is always going to be a key part in substantiating or refuting a complaint, as they tend to be more comprehensive summaries of all work undertaken for DB transfer work.

“If an adviser cannot be bothered to do a proper job for high-risk, high-reward work, it makes you wonder what effort goes into the rest of their advice.”

This experience resonates with First Actuarial business development director Henry Tapper, who has seen DB transfer suitability reports around the British Steel Pension Scheme as part of Operation CHIVE, the pro-bono initiative to help former steelworkers.

He says: “Some of the advisers do not own their own suitability reports and, although they have written them, they do read like they have been through the compliance department. The bad ones will have loads of appendices, waffle and legal wording to squirm out of liability. They read like a legal document and not something written for you.”

Tapper thinks the best reports have solid cashflow planning and modelling, a client’s attitude to risk and, most importantly, show empathy with the customer.

He adds: “There has got to be a narrative which people can engage with so the customer understands not only what they are doing but why. If I am paying £1,000, I want to have a suitability report which I enjoy reading.”

Although the quality of a suitability report is critical to shaping the outcomes for a client, Tapper believes it also reveals something fundamental about the psychology of the adviser.

He says: “Most advisers are insecure and feel they have to pad out reports. But the really good advisers do not feel they have to show off and shove stuff in the client’s face that they do not need to know.

“That is why adviser qualifications are not that important. I have seen advisers who are well qualified and understand the FCA’s conduct rules. Yet they do not have any interest in terms of understanding their clients’ needs. They are all about being compliant and not giving advice.”

Tapper adds: “Some of the documents are so commoditised, insensitive and badly written that they are not going to pass scrutiny with the course of law. The Financial Ombudsman Service will just throw them out.”

Taking orders from the client

CanScot partner Robert Reid says his financial planning business makes “very creative reports” that are “a unique selling point”.

There are particular giveaways when a suitability report has not been tailored in this way to reflect a specific DB transfer, according to TCC advisory director Phil Deeks, who highlights three main objectives that are often used to justify transfers: flexible benefits, pension scheme security and death benefits.

Ten tips for the perfect suitability report

Deeks says: “Suitability reports often read as if the adviser is taking an order from the client – for example, reports stating that the client wants to transfer so that they can take their income flexibly, which makes it suitable.

“While flexibility is a valid reason for wanting to transfer and can be a useful method for tax planning, the client can only take their benefits from age 55. We’ve reviewed reports where the client is under age 55 and one of the reasons for transferring is to take their benefits flexibly.

“Other client objectives that are often not validated by the adviser include concerns about the security of the pension scheme and, perhaps more frequently, when the client wants to take control of their funds.  While these can be legitimate reasons for transferring, the suitability report should validate these reasons. For example, the report should explain the scheme’s funding position and confirm if the adviser also has concerns about the viability of the scheme.

“Where a client has stated that they want to control the funds themselves, the adviser should outline why the client wants to do this. For example, the client may have extensive fund management experience.

“Another common failing of suitability reports is not explaining the client’s objective of better death benefits in sufficient detail. A report may state that the client’s objective of achieving better death benefits is met without giving due consideration to the value of death benefits in the scheme.

“For example, a two-thirds spouse’s pension is a very valuable benefit to lose if the client has a spouse. However, if the reason for wanting higher death benefits is to provide for children on death, then this makes losing the two-thirds spouse’s pension less important.

“Good practice in this area is clearly stating whether the objective for wanting to increase death benefits is focused on the client’s spouse or other dependents. The death benefits analysis in the transfer value analysis should be summarised in the report and the importance of these figures explained. Poor practice is just stating that the client’s objective of better death benefits is met without further explanation or reference to the analysis in the TVAS.”

Adviser agreement

This kind of statement of an objective as a reason to transfer without further qualification is mirrored in examples of similarly shallow risk warnings issued to some BSPS members seen by the Financial Times’ Josephine Cumbo.

The five-point warnings included that unit prices could fall as well as rise, that the report relied upon some self-certified information, that past performance may not repeat itself, that legislation may change, and that capital could be lost with time out of a rising market.

As some advisers note, this would be equally appropriate for an Isa transfer as a DB transfer.

Red Circle Financial Planning director Darren Cook said these were “not even close” to suitable risk warnings. Dobson and Hodge financial planner Paul Stocks said that warnings would not even have been adequate for standard defined contribution pension risks, let alone a DB transfer.

However, advisers were still keen to debate the optimal length of a report, with a number saying that they produced around 20 pages of client-specific material before any more standardised elements including key information documents, performance projections and TVAS calculations.

One particular risk that the Pension Protection Fund feels is being misused by some advisers to encourage transfers is the danger of falling on the lifeboat fund itself.

The PPF has hinted that some advisers are leading clients into a transfer by exaggerating the likelihood that DB pension benefits are unsustainable, more schemes will fold, and the client will get back less than their pot by claiming on the PPF.

Adviser view

If I was advising you on such a complex market, chances are you would not know the intricacies of the scheme. What am I getting out and what am I giving up, what must happen for it to achieve parity? That’s what it comes down to, and can be explained in a few paragraphs. You don’t need a humongous TVAS calculation. You give people the headlines. Based on your risk profile, this is what you are likely to achieve based on historic data. We could say, even with losses such as these, that they could be swallowed up by other things. The portfolio is a separate appendix discussing all the costs for them.

Kusal Ariyawansa is a financial planner at Appleton Gerrard

Expert view Rory Percival Peach

There are two main issues with suitability reports. First, they are often too long. This is because some companies prefer to include lots of subject areas that are unnecessary or could be covered better elsewhere. For example, a section recapping on the area of work agreed could be better covered in a letter of engagement. Second, and more important, is they often lack adequate personalisation. Fact-finds and suitability reports should record the colour and detail of the client’s circumstances, particularly their needs and objectives.

Whenever the client has an objective that explains what they want to do, such as have flexibility, the adviser should ask why to help get the colour and detail. This will also help the adviser understand whether the transfer would be the best way of meeting this objective.

The good suitability reports are ones where the needs and objectives are clearly personal and there is the colour and detail such that it tells the story of a real person. The poor ones are heavily templated and someone reviewing it – be it the FCA or Financial Ombudsman Service – cannot ‘see’ the real person and therefore cannot understand whether it is suitable or not. Clearly there is scope for a client to say of an overly templated report ‘that wasn’t me’ and this could well be believed by the FCA or FOS.

If a FCA or FOS person is reviewing a file with a genuinely personalised suitability report and the client says ‘that wasn’t me’, the client is much less likely to be believed by the reviewer as it is clearly talking about a real person and the record is contemporaneous.

Rory Percival is an independent regulatory consultant

‘Generic’ Letters

Risk warnings for a DB to DC transfer with flexible access drawdown in a suitability report to a former steelworker, as posted on Twitter by the Financial Times’ Josephine Cumbo.


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There are 19 comments at the moment, we would love to hear your opinion too.

  1. Richard Anderson 1st February 2018 at 9:47 am

    I think that many, if not most, Advisers genuinely want to do a good job, because it is in the interests of their long-term career path and would add that those Advisers who are also business owners have a greater vested interest in getting things right. For a long time now I have advocated that getting Advisers, the FCA and FOS round the table to take a good, hard, pragmatic look at Suitability Reports is the best way forward. Yes, in many ways, Advisers do write reports to that would hopefully stand up to FOS or FCA scrutiny – but then why wouldn’t they do it that way! Suitability Reports should be written for the client – lets just get some sensible views on what they should look and read like whilst also meeting everyone’s requirements.

  2. I recall a network some years ago advising transfers from existing PP policies onto a platform.

    One point made repeatedly was that the platform gave far more fund choices, frequently without explaining the options with the existing policy.

    Furthermore, even when this was explained, the adviser did not explain why this feature had not been fully used in the past.

    Best option is often buddy checks. If the buddy has questions after reading the Report, take another look at its

  3. What we need is clarity from FCA and FOS what is required and not for th4em to shy away and tell advisers to speak to their compliance people, even they don’t know.

  4. The PFS has published a very useful “Good practice guide” on DB transfers and that can form a good framework for suitability report construction.

    In practice I think suitability reports should be presented to clients so that they have the opportunity to ask and have answered any questions that they have.

    MM recently raised the point about what checklists FCA and FOS use to determine suitability it would be very useful if the regulatory world could publish those just to make sure we are all thinking about this subject consistently

    It would be good to have a consistent view of suitability

    • The FCA checklist and file review training slides can be found on the FCA website. Look in the FOIA section for (I think) February 2017

      • They also hand them out in the “Live & Local” seminars they have held across the UK for the last 18 months.
        Advisers (including me)need to whinge less amongst ourselves and engage directly with the FCA staff at things like the PFS quarterly meetings and the FCA Live and Local seminars.

        • Not at the one I attended in Crawley Feb 2017

          There is a difference between “whinging” and asking for stuff though. I agree with you less of the former more of the latter

      • Thanks Rory but nothing shows in the FOIA section or under a search for Defined Benefits Transfer Checklist maybe they call it something else?

        • It’s not specifically DB transfers. It’s the checklist used for all investment advice

          • Thanks Rory. I guess I was expecting that the FCA would have a checklist that considers the intricacies of DB transfers rather than an all embracing investment checklist.

            I think I will stick with the PFS best practice guide as the benchmark that FCA and FOS will aspire to

  5. My issue with all of the comments are, what are the alternatives?
    The FOS does not work to the rule of LAW. We are told if its not in writing, we did not advice the client.
    We are told DB Pensions are gold plated GUARANTEED pensions. There not, even the FSA had the good sense to remove the word Guaranteed from their rule book. If they where guaranteed why are members seeing their schemes fail and benefits cut. To the members this does not look like a guarantee at all.
    The comment about the PPF I also find very interesting. I have recently been challenged by a client to put in writing the PPF is guaranteed and the client would not suffer any further income loss, he is 45 years old and the NRD is 65. Would you put in writing to that client it is guaranteed not to be reduced? Therefore the comment about changing legislation has to be included.
    The biggest danger by far for advisers is not explaining clearly the risks and documenting them.
    Its time people stopped pointing fingers and started pushing for a regulated standard template, which we can then personalise for your clinets.
    Anyone can find fault, finding the solution is the difficult job and no one seems to be either up to the job or wanting the job.

    • I think it’s the definition of the word “Guaranteed” that needs clarification.

      It does not mean “100% absolutely certain come what may”.

      A guarantee is only as strong as the guarantor and/or the firm underwriting it. Take the guarantor/insurance away and the ‘guarantee’ is worthless.

  6. The entire DB transfer discussion contains so many aspects that there is a danger the key issues are missed or confused.

    For example, whether a TV out of DB is appropriate or not is a wholly different issue to whether the adviser has disclosed the charges on the underlying investments (? even outlined the underlying investments at all).

    My understanding (but I am happy to be corrected) is that where a file fails FCA scrutiny, it’s not from the advice angle per se, but the advice process angle.

    I.E. a transfer out of DB may be suitable in a specific case BUT if the advice isn’t compliant then the advice is likely to be unsuitable – therefore it’s perhaps important to understand that if (e.g.) 50% of reviewed files are unsuitable, that doesn’t mean that those individuals should not have transferred out of their DB scheme (which is often the implication).

    Having said that, bad practice (and bad advice) needs to be targeted but I do feel that there’s many aspects that are getting conflated.

    • Please be corrected. The FCA file review considers whether the client has received the right advice, ie the right outcome. Process failings are fed back to the firm separately but are not part of the score. The exception is the second outcome tested – disclosure – which can failing a procedural point, e.g. if the adviser charging is incorrect. But this is scored separately from the suitability score

  7. I somewhat disagree with Henrys comments re cash flow analysis included in the reason why letter I will be as bold to say advisers who just present a cash flow analysis on its own it just a silver bullet. If a claim on DB transfer advice was ever made cash flow analysis and multiple what if scenarios could be a disadvantage to the financial adviser in defending a claim
    The FCA starting position has not changed. There stance is DB pension transfers are not in the best interest of the client, although we are awaiting the reply to consultation paper CP17/16, Advising on Pension Transfers. Do you think that just adding cash flow is going to save the adviser No it will not?
    It saddens me that not one of the experts have pointed out that prior to the suitability report a financial plan should be consider I think it is essential if one is to meet the FCA standards on DB Transfers
    Here are my reasons why
    Before any advice is given a plan should be presented to the client with a minimum of 5 modules as outlined in the financial planning standards board documentation.
    The first been a detailed analysis of the client’s assets and liabilities. Over the years I have worked with client many are surprised when a true market value is placed on their net worth This analysis to me is invaluable helps the client understand their financial resources available to fund their current and future lifestyle
    The second module is a detailed analysis of their current income and expenditure. I underline detailed because not only does it give the client an indication of their current standard of living. It is essential if the client is to make the decision to transfer from a defined benefit scheme. It shows the client what they actually spend money. Recently I’ve seen comments that stated you don’t require a detailed analysis of expenditure a consolidated will suffice Today we live in a world in which accessibility to ATMs and contactless payments result in forgotten expenditure items. When added up over a calendar year period they can be quite significant.
    Finally a detailed analysis can give the adviser an indication of what financial resources can be if required be allocated else were to maintain the client’s standard of living now and in the years ahead
    One of the most essential modules is risk management and it should be included. This cannot be placed in isolation and is essential in any financial plan We all know at some stage we are going to die that is a certainty While the percentage odds of disability are somewhat lower both risk destroy of wealth years of hard work have created that wealth If this is not analysed and understood by the client then the adviser is failing in his duty.
    I hear a lot about TVAS but very little about pension planning If possible this should be done in today’s terms. Academic research shown that if presented in today’s terms the client has a better grasp of the whole concept of retirement and complexities they must consider.
    It might be prudent to include an estate planning I say this, because most of the time I have ever heard why clients want to transfer their DB pot is to pass the wealth on to the next generation Surely, if that is one of the client’s goals he has to understand how this can be achieved in most tax efficient manner
    Only when these four stages have been adopted can advisers consider cash flow planning. The financial planning standards board thinks the cash flow planning is not essential within a financial plan. My experience over the years I can now see the logic of that statement. OK you done your fact find and in the client own word one of his objectives is a comfortable retirement and maintain his lifestyle. Personal speaking there is only one way to measure that objective in terms of money. Put simple a cash flow is purely there is a quantitative and qualitative analysis tool It measures in monetary terms that a client can achieve their objective and goals with his current resources he has today. Thus, my comment that the cash flow can be a sliver bullet Frankly too many scenarios of cash flow planning confuse the client I should know I made that mistake quite often.
    For the last twenty-five years there have been great strides in financial planning software and I have stayed loyal to the version I have used for the last 25 years. If I was perfectly honest given and given the choice I would much between prefer the old DOS version I started out with 25 years ago. Saying that I am not a complete Luddite and welcome the advances made in top software technology, but I still stand with the old principle that the cash flow is a quantitative and qualitative analysis to that is part of the overall financial plan.
    If foot notes are added to the plan it quite easy to reduce the reason why letter to a page or maximum. I am sure the judge would appreciate it instead of seeing rems of cash flow planning scenarios he may never understand.

  8. DB transfers are a major area of concern for the FCA. As such they should be providing seminars to advisers pointing them in the direction of what they believe ‘best practice’ to be. Obviously they may not have the resources to do this on a national basis. However, they could produce a video that could be shown at regional PFS meetings. This would get the message across before too much bad advice is given and save a lot of problems in the long run.

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