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Follow the money: Where are advisers going wrong on DB transfers?

FCA targets the gaps in the DB transfer advice process

The FCA is slowly beginning to show its hand on what advisers should and should not be doing when it comes to defined benefit pension transfers.

The emerging theme from the regulator is concern that consumers will end up being placed in unsuitable funds after transferring.

It was revealed this week that a total of 92 firms have been part of the FCA’s review of DB transfer advice, with 10 visited by the regulator.

Money Marketing has investigated the details and the nuances of the DB transfer market to see if there are lessons for advice firms about how to manage an ever-escalating regulatory issue.

Risks in the rules

The FCA published its latest consultation on DB transfer advice in June, which set out the regulator’s plan to remove existing guidance that the starting point for advisers is to assume a transfer is unsuitable.

The paper also highlighted firms may be focusing on advice outcomes in isolation from the set-up of the DB transfer. The FCA raised the potential pitfall that while pension transfer specialists may hold the specific transfer qualifications, they are not required to hold the qualifications to be an investment adviser.

It reads: “Advice on a conversion or transfer of safeguarded benefits will often also be investment advice. We want to understand how many pension transfer specialists are not also investment advisers and whether any risks arise in the way the current rules operate.”

The FCA is consulting on how pension transfer qualifications are working. But it also hinted it may go further to ensure pension transfer specialists have sufficient investment experience.

The regulator said: “Firms must make sure their employees are competent to undertake the roles they are performing. Given the complexities of this area it is our view the pension transfer specialist qualification alone is not enough to demonstrate this competence.”

According to Prudential, of the 7,000 individuals with the necessary exam passes to carry out DB transfers, only 4,000 are level 4 or above qualified advisers.

The FCA paper builds on previous guidance from January, which said the regulator was “aware some firms have been advising on pension transfers or switches without considering the assets in which their client’s funds will be invested”.

At the time, the regulator asked advisers to consider what assets client funds will be invested in, as well as the “specific receiving scheme” post-transfer. It also noted critical yield calculations were not good enough on their own if they did not account for the expected returns of the underlying assets.

The battle on the ground

These concerns may be behind the actions the regulator has taken as part of its review of DB transfer advice.

Money Marketing revealed earlier this month that Selectapension had suspended its DB transfer service following an FCA audit. Further investigation uncovered the subject of the FCA review was advice firm CFPML, Selectapension’s outsourcing partner. It was CFPML that was giving the advice and deciding on funds, with varying levels of input from introducing advisers.

A similar situation applies to the voluntary agreement between Financial Solutions Midhurst and the FCA to cease advice on pension transfers, another suspension announced this month. It is understood the involvement of one of the firm’s appointed representatives, pension specialist Heather Dunne IFA, was partly behind the regulator’s enquiries. HDIFA draws up suitability reports for transfers.

Individuals with compliance responsibilities are also in the firing line. Last week the FCA fined compliance oversight officer David Watters £75,000 for failing to exercise due skill, care and diligence in his role at advice firms FGS McClure Watters and Lanyon Astor Buller, leaving 500 clients open to the risk of an unsuitable transfer.

First Actuarial director Henry Tapper says: “The critical thing people seem to be missing out on is the FCA is very keen to hold advisers to account for the outcomes of the advice that’s given. It is saying it’s not enough just to give the transfer value analysis calculation. You have got to be clear the recommendation leads to a positive outcome.

“The FCA knows there’s a crisis going on. But the danger is the market is already travelling at 80 miles an hour, and the regulator is seeing if it’s possible to pull on the handbrake.”

The FCA knows there is a crisis going on. But the danger is the market is already travelling at 80 miles an hour, and the regulator is seeing if it is possible to pull on the handbrake

Aviva head of retirement policy John Lawson says investment solutions will vary considerably based on what the client wants after transferring, from tax-free cash to inheritance planning to lifetime income or having ready cash available.

He says: “A lot of advisers outsource to DB specialists because they are set up to have appropriate qualifications and the process in place to do that, but ultimately it’s a joint piece of work. Customers have got objectives beyond a DB transfer, it’s a question of what they are going to do with the money in the defined contribution world. As well as just looking at critical yield, we have to pay regard to how they are going to invest that fund afterward, and whether the return on that investment is still going to be sufficient or if it changes the recommendation.

“If clients are coming out of a DB scheme and are conservative they might be better off with an annuity in the first place. Having that dialogue with the outsourcer should determine whether or not that transfer goes ahead at all.”

Feeding the scammers

Pension Life attempts to recover losses for pension scam victims. Director Angie Brooks says she recently saw a case where a client’s portfolio has fallen by 50 per cent in the three years after transferring due to high-risk post-transfer fund selection.

The client was approached about transferring by Dubai-based investment company Holborn Assets.

Funds included the liquidated New Earth Recycling fund from Isle of Man-based Premier Group. This lost around £135,000 due to the fund’s closure.

The best-performing holding was GSA Coral Student Portfolio, a Luxembourg-based manager that invests in purpose-built student accommodation, targeting more than 8 per cent returns a year.

Brooks says: “Transfers in general and DB transfers in particular are the nectar that scammer bees feed on. The investors don’t stand a chance.  Whatever their – sometimes perfectly genuine – reasons for transferring, they can end up in hugely expensive offshore insurance bonds and professional investor-only structured notes or toxic, high-risk funds.

“Sadly this is entirely typical. Funds are picked on the basis of what happens to be paying the highest commission that week.”

Prudential senior business development director for pensions Stan Russell says advisers need to be in control of where funds are going.

He says: “Do advisers know enough about where the money is going after the transfer? Perhaps historically a decision was made based on critical yield; lots of compliance officers would work on a critical yield rate above which we just don’t go. A decision was made on that basis; investment decisions were made later on.”

Russell points out when the FSA reviewed pension switching, some switches were made based on clients moving into a cash fund with 0 per cent charges, when in reality they had moved to a discretionary fund manager charging 1.5 per cent or higher. He says there can be a disconnect between “should we make a move” and “where the money is going to go”.

The Tideway model

It is understood Tideway, an adviser and asset manager marketing DB transfer services, is another one of the firms that has been visited as part of the FCA’s DB transfer review.

It is said to have approached at least one external consulting firm about reviewing its processes.

On its website, Tideway has a transfer value analysis calculator allowing potential customers to enter their annual pension income and what age it is due to start to come up with a likely transfer value.

It also has a calculator looking at how far post-transfer benefits would stretch to children or grandchildren at age 80, 85 or 95, depending on real annual investment returns ranging from -2 per cent to 2 per cent.

The calculator has been criticised by advisers as “dangerous” and they have warned of the risks of setting “false expectations”.

Clients are referred to Tideway by wealth managers like Brewin Dolphin and then passed back to them, or introduced through advisers who use Tideway’s DFM.

Tideway says typically less than 20 per cent of clients approach the firm directly for transfer advice and will be placed in a managed solution. For those that are keen to self-direct, they will be transferred to Hargreaves Landsdown or AJ Bell Youinvest.

Tideway will interview the adviser-introduced clients to decide on a risk-rating for their portfolio, and does not rely solely on briefs from the introducing adviser.

Tideway managing partner James Baxter says the firm has paid more attention to the DFM client’s choices as the FCA’s position has become clearer.

He says: “The FCA missive has tightened that up. We were seeing it as a bit of a two-step process with the transfer advice first, followed by advice around the investment.

“But that’s not how the FCA is seeing it. It sees the transfer as an end-to-end recommendation for the transfer, product and investment solution.”

Tideway charges an initial transfer fee of 1 per cent across the board.

It charges 0.25 per cent for its Horizon DFM portfolios. It manages three in-house  fixed income funds with equity funds managed by a third party.

Total expense ratios for the in-house fixed income funds range from 0.76 per cent to 1.36 per cent, taking total DFM costs to around 1 per cent or more. Platform charges are a further 0.2 per cent, with adviser charges making up the rest of the cost.

Where clients use the full Tideway service, without a referring adviser, the ongoing charge is 1.35 per cent. There is a “loyalty discount” incentive to stay with the provider for more than three years, where this is reduced to 1 per cent.

Tideway’s website says the majority of clients appoint the firm as ongoing advisers and investment managers.

Baxter says: “If someone wants to pay 3 per cent for a transfer, they can probably get advice for a bespoke solution. But we are charging 1 per cent for the transfer, and we don’t have the budget to go and do individual portfolio due diligence for advisers who want to do random stuff.”

He says since the FCA’s January guidance document, the firm has also become more cautious over DIY investors, asking them to write to the firm detailing what they are going to do with the money.

We are debating what next for DB transfers at Money Marketing Interactive, which is being held at the Majestic Hotel in Harrogate on 14 September. To join over 100 advisers and register to secure your free place, click here

Who is in the dock over DB transfer advice?

Ordered to cease business: Strategic Wealth UK
Voluntary agreement to cease business: Intelligent Pensions, Financial Solutions Midhurst
Temporarily suspended services:  Selectapension
Visited by FCA: Tideway, CFPML, Heather Dunne IFA

Adviser views

Alistair-Cunningham-700.jpgAlistair Cunningham
Wingate Financial Planning

The key thing is a firm’s transfer recommendation has to be holistic, which is why the move to a more cashflow planning-led approach makes sense. It is not just about the investment piece, it is about all the areas of advice that are impacted, but when you outsource the transfer you are losing some or all of the bigger picture.

Darren Cooke
Red Circle Financial Planning

The investment makes a real difference to critical yield calculations. If you are taking that business on as an outsourcing firm, you have got to know where that money ends up. Either you have got to handle the recommendation yourself, or, when you pass me the client, you have got to tell me where you want the money to go, not just the platform, but funds.

My problem with outsourcers in general is it is difficult to have a personal outcome when you have not spoken to the client andwhen you are dealing at arm’s length.

Expert view: Ongoing support is vital 

Since the pension reforms, the FCA has made a number of observations about how the industry is adapting. Clients now have radically different options and advisers have the headache of how to give their clients what they want without falling foul of the regulator’s expectations.

The recent suspension of activity by a number of firms involved in facilitating pension transfers has highlighted some key issues.

Where pension transfer specialists and a separate advice firm are involved, the specialist firm has often advised on the transfer itself. This leaves the referring advice firm to recommend the investment make-up of the receiving personal pension. The advice to transfer without knowledge of the intended home for the funds has an obvious flaw, but it does not mean that this type of arrangement is redundant.

Bearing in mind assessing suitability must consider the destination of the transferred funds, the two firms will be responsible for different parts of the advice. They should liaise closely with each other to ensure the overall recommendations are suitable and that they can each demonstrate suitable advice. The client should also be clear on who is advising on which element.

Although this is possible, firms that choose to be only involved in the transfer element, should be aware that “customers” are more likely to complain than clients that have a relationship with a firm.  With no ongoing service and no client relationship the future risk is increased. The ongoing support during the retirement journey is as important as the transfer decision itself.

Through additional guidance and further discussion the FCA intends to provide a framework to support the new freedoms. There is a long way to go.

Russell Facer is compliance director at Threesixty



Richard Parkin: DB transfers aren’t black or white

I think we were all pleased to finally see the FCA’s consultation on defined benefit transfers. Even for those that don’t agree with all of the content, the time for revision of the current rules is long past. Even before pension freedom, the rules, many of which were formulated in the aftermath of the mis-selling […]


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Jeremy Pearson is Technical Support Manager with Canada Life’s ican Technical Services Team. Canada Life offers a range of wealth management solutions, including retirement income planning, estate planning and investment solutions from a choice of jurisdictions, including the UK, Isle of Man and Republic of Ireland. Many parents value the standard of education offered by […]


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There are 3 comments at the moment, we would love to hear your opinion too.

  1. “Pension Life attempts to recover losses for pension scam victims. Director Angie Brooks says she recently saw a case where a client’s portfolio has fallen by 50 per cent in the three years after transferring due to high-risk post-transfer fund selection.”

    Sounds like a rather optimistic valuation. I imagine that this 50% fall is based on the fact that 50% of the unregulated investments have gone bust (value = zero) and the other 50% of unregulated investments have not gone bust yet (so the value is still quoted as the book cost).

  2. I do not disagree with the FCA’s efforts to focus on the end-to-end process and tighten up on the advice provided by regulated advisers to ensure greater certainty. This may provide more reassurance to some advisers to provide advice to potential clients. But where is the campaign to inform, educate, and warn clients against taking advice from the unregulated sharks? Much more could be done here I feel by both the FCA and TPR.

  3. Why is MM repeating this negative headline and where is my original comment please?

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