Posted: 28th March 2018
First published by Citywire in March 2018
It has previously been reported that a number of firms giving advice on pension transfers have voluntarily given up their pension transfer permissions as a result of an investigation by the regulator.
But how ‘voluntary’ is such a decision? And why would a firm make such a move?
‘Own Initiative Requirements’ (OIREQ) and ‘Voluntary Requirements’ (VREQ) are part of the FCA’s ‘early intervention’ programme. These are designed to eliminate or reduce an ongoing risk to consumers or markets. An OIREQ imposes a restriction on the firms’ business activities, whereas a VREQ involves the firm agreeing to implement the restriction.
Clearly an OIREQ is out of the firm’s control, but you may also question how voluntary the VREQ agreement actually is, given the scenarios in which it is prevalent.
Technically, it is voluntary, as the firm has the option to reject it, however, in the context of a regulatory investigation, where the firm is at risk of the FCA taking a harder line with them, it may feel somewhat like the forcing of a firm’s hand.
Agreeing a VREQ (or receiving an OIREQ) may not be the only impact on a firm. Such actions are often accompanied by a requirement for a Skilled Persons report, also known as a Section 166.
This is where the firm must appoint an approved third party with appropriate expertise to review certain aspects of the firm’s business, as set out in a ‘Requirement Notice’. The cost of a review is incurred by the firm.
The FCA has a panel from which the firm can appoint a skilled Person. The panel is divided into different lots according to the type of expertise of the third party, i.e. for pension transfer advice, Lot D (Conduct of Business) is likely to be the most relevant. The panel is created by a tender process with the FCA, and Skilled Person firms must re-tender every four years.
Proactively addressing the issues
When the FCA decides on what (if any) enforcement action to take, their own rules require them to consider “the degree of co-operation the firm showed during the investigation of the breach”. Agreeing to a VREQ is likely to be regarded as evidence of co-operation with the FCA, and in agreeing to a VREQ, the firm will be seen as taking proactive action to mitigate the actual or potential damage to customers.
Even before a VREQ has been tabled, a firm should consider what additional assurance it can give the FCA to alleviate its concerns. For pension transfers, a firm could set out plans to demonstrably increase the quality of a pre-approval process, or, if it would assist their case, obtain a ‘second opinion’ from a third party recognised by the FCA (i.e. from a Skilled Person firm).
Proactively taking action to provide the FCA confidence in the advice being offered (or the capacity to ensure ongoing advice provision is suitable) may avoid the firm having to voluntarily give up the permissions. It could also help avoid an expensive Section 166 review, which may not be needed if the willingness and appropriate level of proactivity is present.
For firms who have already given up their permissions, this need only be a temporary measure.
The firm will need to work hard to make the right changes to ensure that the FCA’s concerns are addressed. If a Section 166 has been instigated, this process may take longer, as the firm has to satisfy both the FCA and the Skilled Person in more formalised proceedings.
However, it is achievable, and the firm is likely to emerge from the process in much better shape, with a greater understanding of regulatory expectations, and a business model which is more robust against the risks identified by the regulator.
Remember, even though the FCA must protect consumers, they also have a competition objective, which means they should not stand in the way of competent firms giving sound pension advice.