The FCA has published its Policy Statement PS18/20, which sets out its new rules and expectations regarding pension transfer advice.
The changes in brief
The Policy Statement details three key areas of change.
- Adviser qualifications: by no later than 1 October 2020, pension transfer specialists will be required to hold the Level 4 qualification for providing investment advice, as defined in the Retail Distribution Review. This qualification must be held before they can either advise on, or check, pension transfer advice. The aim is to raise the standard of advice that is being given to clients particularly relating to the suitability of the transfer. Where an adviser does not hold this qualification, this will not prevent them from providing pension transfer advice, but their advice will need to be checked by someone who does. There has been some comment in the industry press that the number of qualified advisers is likely to decline due to these changes, particularly the costs of training for staff.
- Preparing to give advice: the advice given must take into account the proposed destination of the transfer funds. This could include using two advisers to (1) provide the pension transfer advice; and (2) provide advice on the receiving scheme, its investments and risks. Where a two-adviser model is used, it will be for firms to make that arrangement clear to the client. This will which include identifying the roles each adviser will play in the advice process, the charging structure which will apply, and the complaint process for both firms. The Financial Conduct Authority (FCA) has commented that liability for any future investment decisions will depend entirely on the circumstances at the time the advice was given, and any particular advice which the client relied upon.
- Providing advice: the FCA was concerned that some advisers were focusing on investment risk and ignoring other factors relevant to a pensions transfer. Therefore the Conduct of Business Sourcebook (COBS) rules now include guidance, identifying the factors the FCA considers should be taken into account with advising on a pensions transfer. These include informing the client of longevity and investment risk. Advisers are also asked to consider sponsor insolvency risk, owing to client misconceptions regarding the role of the Pension Protection Fund. The revised guidance also specifically addresses the use of risk profiling software, which can be overly focussed on investment risk at the expense of other concerns.
Regarding insistent clients, the FCA considers that their existing rules and guidance are clear concerning what is expected for these clients.
Will these proposals protect consumers?
The proposals should ensure more thorough processes are in place. However, that will come at a cost to clients in two ways:
- The need to assimilate and understand much more information pertaining to their transfer. This can take time, and as we all know, pensions language is seldom the easiest to grasp.
- The cost of advice. As more work will be required on the part of advisers in this process, it is difficult to see how these costs will not be passed onto consumers.
As we know, some clients approach an adviser with a pre-conceived plan with little interest in heeding any advice and even less interest in paying for it. In our experience, such clients can also be the first to complain if things subsequently go wrong.
Continuing uncertainty for advisers
The following areas may still provide continuing uncertainty:
- Even if the new rules are followed to the letter, Defined Benefit (DB) transfers remain an area of risk for advisers, particularly if they are supervising others, rather than carrying out their own analysis. That in turn makes such transfers a significant risk for insurers, which will affect the availability of suitable PI cover. The risk is exacerbated by recent proposals to increase the FOS’ award limits to £350,000 for complaints received on or after 1 April 2019.
- Allocating responsibility between advisors where a two adviser model is adopted may be difficult. The statement makes clear that in the event of any complaint the Financial Ombudsman Service (FOS) will assess where a fair allocation of liabilities lies. The FOS can find that liability rests with one adviser only or find against one adviser and leave it to seek redress from the other. The FOS can also decide that separate complaints have been made about the pension transfer and the investment advice: if so, two awards can be made.
To transfer, or not to transfer? That is the question
The FCA remains concerned at the large amount of pensions transfer activity involving Defined Benefit Schemes. As the statement says, most consumers are best advised to keep their DB scheme in place, yet an estimated £20-£30 billion is being transferred out of such schemes a year.
These changes hopefully increase the prospects that consumers receive sound advice on proposed pension transfers. If they work as intended, they may diminish the number of such transfers, though they will not end them (nor are they intended to). Ultimately, for advisers, greater detail from the FCA on what it expects from them is probably good news, and should make it easier for them to confirm that they complied with their obligations. Woe betide them (and their insurers) if they do not, particularly if a large pension pot is at stake.