On the 19th June 2019, the FCA published the results of its market-wide investigation into defined benefit (DB) pension transfers.
As the regulator says, after taking out a mortgage, deciding whether or not to transfer a DB pension – designed to provide a set income for life – into a single cash lump-sum is one of the most complex and personally impactful financial decisions a person can make.
The FCA has long been concerned that such transfers may be largely unsuitable for the majority of retirees and that advice given around them may not be up to the required standard (and actually unsuitable in around half of all cases). With some 3,042 firms holding DB transfer advice permissions, the potential for harm is obviously significant.
The regulator has, as part of its work in the sector, arranged training and events and undertaken policy work to strengthen the rules around pension transfer advice. They have also taken action against firms wherever risk to consumers was identified.
The data presented in this publication was gathered between April 2015 and September 2018 and was collected to identify where poor practice may be occurring. Although this data cannot definitively prove the quality of advice currently being received, it will allow the FCA to continue its supervisory work, preventing harm by identifying where risk is highest.
Some of the findings published on the 19th include:
- 1,346 firms reported data on clients who had not proceeded after receiving initial guidance (59,086 clients in total)
- 234,951 DB scheme members received advice on whether to transfer between April 2015 and September 2018
- Of those receiving advice, 162,047 members (69%) had been recommended to transfer out, and 72,904 members (31%) had been recommended not to transfer – a worrying figure if the FCA considers that most pension transfer advice is unsuitable
- Of those advised not to transfer, 9,534 (13%) of those clients transferred as ‘insistent clients’ (those who decide to enter into a transaction different to that recommended by a firm or personal recommendation)
- Across recommendations for and against transfer, the average transfer value was £352,303 equivalent to a total value advised upon of £82.8bn
The FCA will continue its supervisory work throughout the remainder of 2019 and will soon be writing to firms where potential harm from transfer advice was identified.
Depending on the findings of this year’s assessment, the FCA may consider extending assessments to a wider range of firms in 2020. The regulator will also roll out a series of events aimed at raising standards in the industry next year.
Considerations for firms
The FCA says that it “expects advisers to start from the position that a pension transfer is unlikely to be suitable for their client.”
Firms must ensure that any advice they provide in terms of transferring a pension pot is entirely suitable to the client, and that they take effective measures to protect “insistent clients” who may be pushing against advice given. Initial triage that filters out those not wishing to transfer as a result of initial discussions should go a long way to preventing unsuitable advice being acted upon.
Firms should be considering the advice standards they set for their adviser network and how they might mitigate the risk of any party acting outside of this. Effective business quality assurance and new business checking controls should be put in place, under a robust governance framework.
Training and competency schemes should be designed to ensure staff understand the risks and consequences of unsuitable DB transfer advice. On the other side of the same coin, remuneration and incentive schemes must not lead to poor outcomes. If they currently are, it is far past time to ‘nip this in the bud’.
It will also be in firms’ interest to better understand the risk already crystallised in their advice book. They can do this by pro-actively undertaking past business reviews and remediation exercises, assessing the impact and detriment to customers and taking steps to resolve this before being hit by potential enforcement action.
Firms that operate in this market, must, as a priority, take on board all of the recommendations that have emerged from the FCA’s work. Specifically, where the FCA has published specific failings, firms will need to carry out internal investigation to identify whether the same – or similar – issues may exist within their own organisations.