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.”
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.
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.”
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.
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
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
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.