Crackdown on substandard pension transfer advice

Are consumers being poorly advised on pensions, specifically, transferring from a Defined Benefits (DB) pension scheme? On 19 June, the FCA published results of the data it had gathered from firms carrying out Defined Benefit transfers and found that those nearing retirement are transferring out of their DB pensions at an uncomfortable rate.

Since the implementation of Pension Freedoms, consumers have been attracted to the extra flexibility other pensions provide, and being able to access a large pot of cash is understandably tempting.  But do they understand the pros and cons of the choices they are given?

Put the kettle on…

The FCA has started visiting firms with the highest potential for harm focusing on firms that are most active in the market. These visits will allow the FCA to complete a full assessment of the firms’ approach to advice around Defined Benefit schemes.

The FCA is concerned that there are a considerable volume of firms recommending a large number of their clients to transfer out of their valuable defined benefit schemes. The visits will allow the FCA to complete a full assessment of  firms’ practices when it comes to advising on DB transfers. Its expectation is to achieve the same standard of advice being given as seen in the wider financial advice market, where 90% of cases assessed are deemed as having provide suitable recommendations.

Not up to scratch…

The FCA has been clear on their expectations of financial advisers as well as strengthening the rules around pension transfer advice. However the FCA has found that too much advice in the defined benefit pension transfer space is still of an unacceptable standard.

The FCA’s stance is that transferring out of a defined benefit scheme is likely to be unsuitable for most clients. They’re disappointed that transfers are still being recommended at the levels they have seen.

Megan Butler, Executive Director of Supervision, Wholesale and Specialists at the FCA said:

‘Deciding whether to transfer out of a DB scheme is one of the most complex financial decisions a consumer may have to make and it is vital customers get high quality advice. Our ambition is for pension transfer advice to reach the same standard as that of the rest of the financial advice market.’

The FCA surveyed 3,015 firms and found that between April 2015 and September 2018:

  • 2,426 firms had provided advice on transferring their DB pension.
  • 234,951 scheme members had received advice on transferring.
  • Of those 162,047 members had been recommended to transfer out whereas 72,904 had been recommended not to.
  • The total value of DB pensions where transfer advice had been provided was £82.8bn with an average value of £352,303.
  • 1,454 firms had recommended 75% or more of their clients to transfer.

The FCA believe that one way a firm may be legitimately recommending a large proportion of clients to transfer could be where the firm operates robust triaging of its clients. By doing so they screen out those not wishing to transfer after initial discussion. 1,346 firms reported data on the total number of clients who had not proceeded past the firm’s initial guidance. The total number of clients reported as not proceeding to advice was 59,086. When these triaged clients are factored in, 55% of clients were recommended to transfer.

Crossing the line into advice

The FCA released a policy statement back in November 2018 that initially expressed concern that “triaging” may be crossing the line into advice.

As stated above, advisers should start from the view point that a defined benefit transfer is unlikely to be in the best interests of the client. In order to ensure that triaging doesn’t stray into advice, the initial discussions need to be of a generic, factual nature and not specific to the individual client’s circumstances or needs. It should be educational and present a balanced view of the advantages and disadvantages of transferring with the conversation being fully documented to evidence this.

If, following the initial triaging, the client wishes to continue and obtain transfer advice, then the file should clearly confirm and document the client specific reasons for the advice given.

Kind regards…

The FCA plan to write out to all firms where the potential for harm has been identified based on the data they have reviewed, setting out the actions they require firms to take.

Further reading:

The policy statement PS18/20 can be found here

This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.  

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