Posted: 20th August 2020

Embedded in the recent communications from the FCA on the thorny issue of DB pension transfers was a clear message that firms that have fallen short of expectations should consider where they can put things right. Around 700 firms so far have removed their regulatory permissions to advise on pension transfers. A recent estimate suggests approximately 2,000 firms have retained their permissions, however this is reducing ‘daily’ according to the FCA. So what considerations should the firms that have decided to remain active in this market be making?

Taking responsibility

By ‘firms’, the FCA does of course mean a firm’s Senior Managers Functions. In this case it will likely be the individuals who are accountable for advice and for the control framework. However all SMFs have a responsibility to ensure a firm is controlled effectively and complies with the relevant requirements of the regulatory system.

As noted by the FCA in its publications, a number of firms simply don’t accept that there has been any wrong-doing, but all firms need to take an honest and critical look at their past practices. In our experience this can be a painful process to go through, but it is always better to self-report and remain in control. With the right partner the process can result in a stronger foundation from which to move forwards. Between the FCA’s updates on their work over the past few years and a new Guidance Consultation recently published, there is now plenty of information for firms to assess whether or not advice given in the past is in line with regulatory expectation.


Assessing suitability

As Former Pensions Minister Baroness Ros Altmann said in a recent podcast for Huntswood: "The regulator has not been as clear as many providers would have hoped in explaining what it expects them to do, with a number saying that they’re not exactly sure what brilliant compliance looks like. That’s a problem.”

Suitability is not binary, it is multi-faceted and necessarily subjective, which presents challenges for Quality Assurance (QA) and Compliance teams, as well as those responsible for setting advice standards. Standards must be aligned to the firm’s risk appetite and provide clear direction, whilst also providing some flexibility to allow for that subjectivity. Managing all of that in one document is tough.

As a starting point, QA and compliance should focus on outcomes. QA may serve an additional function to ensure that internal processes are followed correctly, but assessment of suitability focuses on the outcome for the customer. Advice standards therefore direct the advisers to what good outcomes look like and how they can be measured. Case studies may help bring these standards to life and provide some context. For example, within our own advice checking framework at Huntswood we have developed a range of theoretical scenarios that indicate suitable and unsuitable advice, which we use when conducting file reviews. While these scenarios may not exactly match real life case files, they help to set base-line expectations and demonstrate to file reviewers what good outcomes look like.

Evidencing suitability

Evidence isn’t just about the suitability of the advice given, but also the record-keeping that supports that recommendation. The FCA found that 28% of files it reviewed had Material Information Gaps, effectively deeming the advice unsuitable. We have identified similar, if not slightly higher levels, of record-keeping gaps in reviews that we have supported. The good news is that initial fact-finds completed during client onboarding are usually comprehensive. Where many firms fall down is keeping the information updated on an ongoing basis and recognising events that may prompt, for example, a review of attitude to risk or capacity for loss. At these times, the adviser should remember that they are the expert and that clients very often won’t know that this is an option. Better to offer to review more frequently than is required, than to come unstuck later following a complaint. Or worse.

Although checklists aren’t often the answer, this is one area where they can add value. Your advice standards should set expectations about the information to be collated, recorded and updated. This is relevant for the fact-find, for information about the ceding scheme and for research that the adviser records about the receiving scheme.

With the FCA’s stance being that all DB pension transfers are unsuitable unless proven otherwise, this is an area that firms need to improve with some urgency. We have been party to many conversations where it’s understood that the majority of advisers are seeking to do the right thing, but without a good audit trail, the intention doesn’t really matter. The record-keeping is as important as – if not arguably more important than – the recommendation itself.

Looking back at your business

Realistically, the only way to properly assess whether customers have been given suitable advice is to conduct a past business review. This could be a review of a sample of cases selected using risk-based criteria. For example: are there any trends that can be identified through MI or does the book of business contain exposure to the British Steel Pension Scheme? Where systemic failures are identified, a full review with appropriate remedial activity taking place would be well advised, in order to demonstrate to the regulator that external intervention is not required.

As a senior leadership team once you’re happy that there is no legacy risk lurking in your back book, the next step is to look forward at how you can collectively mitigate new risk from crystallising. Enhancing and maturing the compliance arrangements and QA is a large piece of the jigsaw, but with the right consultancy support it is one that really can pay dividends.

Tor connolly

Victoria Connolly

Technical Advisor – Wealth, Pensions & Asset Management


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