On Monday 26 March the FCA published CP18/7, a further consultation on improving the quality of pension transfer advice, alongside its much awaited response PS18/6 to the previous consultation Advising on Pension Transfers.
DB to DC transfers are a hot topic in the market, and we want to hear your views. Look out for our survey from Steve Webb later in the week, where you can give us your thoughts.
Let's look at what is contained in this latest consultation:
The FCA has proposed that:
New guidance has been proposed by the FCA to make clear its expectations where one adviser advises on the transfer and another adviser advises on the proposed investments.
They expect both advisers to work together to:
Firms who use such advice models should ensure that robust arrangements and processes are in place, so that the roles, responsibilities and liabilities of the different advisers are clear. Clients also need to be clear on each adviser’s role in the process.
Many advisers operate a triage service as part of their defined benefit transfer advice process. Customers are provided with sufficient information about safeguarded and flexible benefits to enable them to make a decision about whether to take advice on the transfer.
The FCA has reminded firms that if the triage is to be a non-advised service, it needs to be limited to the provision of generic, balanced information on the advantages and disadvantages of pension transfers. The firm should avoid commenting at the triage stage on whether the customer should consider a transfer based on their personal circumstances.
New guidance has been proposed by the FCA on what firms should consider when assessing a client’s attitude and understanding to giving up safeguarded benefits for flexible benefits.
They should take into account:
The above considerations are obvious, but it is difficult to see how advisers and clients can take into account the likelihood of accessing unplanned retirement savings in flexible benefits. Most clients will not know whether or not they may need to access their retirement savings.
The pension transfer advice must take account of the proposed destination of the client’s transfer. In assessing the suitability of the transfer, the PTS needs to:
The FCA has proposed that firms provide clients with a suitability report regardless of the outcome of the advice. Firms currently don’t need to provide a suitability report when the recommendation is not to transfer.
The FCA also proposes that clients are provided with an advice confirmation for all recommendations. Some firms don’t currently provide an advice confirmation for a negative recommendation, thereby preventing such clients from transferring.
These are positive changes. It is important clients understand why it may not be in their best interests to transfer. Providing the advice confirmation on a recommendation not to transfer allows the client to transfer if they still want to proceed on an insistent client basis.
The FCA is concerned about the potential consumer harm that may occur when contingent charging structures are used in pension transfer advice. These concerns stem from the cross subsidies and conflicts of interest in such models, particularly where a firm’s contingent charging structure is dependent on a certain proportion of clients transferring. Such charging models came to the forefront with the British Steel scheme.
The FCA is considering whether it is necessary to intervene in the way in which charges are levied for pension transfer advice. They are wary of banning contingent charging due to the impact a ban may have on the way in which different adviser models operate in practice and the implications on the ability of consumers to access advice, but this needs to be balanced against the risk of unsuitable advice being provided to clients.
At this stage, the FCA is collecting views on restricting the way in which pension transfer advice can be charged and the impact this would have on consumers and firms, but it is difficult to see how they can prevent potential consumer harm from occurring other than through a ban on contingent charging.
Strategic Insight Manager
Robin has worked for Royal London for over 25 years with experience in marketing, research and product development. He currently specialises in the at retirement market.