On 3 October 2017 the Financial Conduct Authority (FCA) produced a snapshot of the current situation following its consultation on defined benefit (DB) transfers and before it produces a new policy, which is anticipated in 2018.
The question was asked about how advisers have adapted their business models in response to the significant increase in the DB to defined contribution (DC) transfer market, with a focus on the risk of harm to those who are leaving DB schemes.
In the past two years, the FCA requested information from 22 firms concerning their DB processes. It reviewed files from 13 firms, visited 12 and, since the process commenced, four firms have “chosen” to stop advising on DB transfers.
The first part of the update addressed the roles of firms that work with advisers to provide the transfer process, how advisers delegate various functions and how, in many cases, advice was unsuitable.
As we know, pension transfers have long been a specialist service and as such required specialist regulatory permissions. This has caused issues for advisory companies that have the clients, but not the requisite regulatory status. To address this, the transfer specialist would work with the adviser to provide the regulated part of the process. There could even be a third party involved to do the investment. The FCA has looked at some of these arrangements and criticised the lack of information sharing between the introducer and the specialist, leaving the specialist with too little information on the client’s needs, objectives and personal circumstances.
The FCA also listed some of the other shortcomings it had found in its dealings with specialist transfer firms:
- Recommendations made without knowing where the money was to be invested.
- Recommendations made by the non-specialist.
- Lack of comparison between the DB scheme and the receiving scheme.
- Lack of consideration of the fund charges and likely returns of the receiving scheme.
- Use of default schemes.
- Lack of resources causing delays.
The point is that such multi-adviser arrangements need better regulation and oversight.
As well as the specialist transfer firms, the FCA looked more generally at the market – the findings were not pretty.
Suitability of advice
The big take away has been the FCA’s concerns on the general suitability of advice. It found that in 88 DB transfers cases where the advice was to transfer, 47 per cent were suitable, 17 per cent were unsuitable and 40 per cent were unclear.
It also looked at the suitability of the recommended product and investment fund pertaining to that product and found that 35 per cent were suitable, 24 per cent were unsuitable and 40 per cent were again unclear.
Caution is needed here, as the sample was very small, but that is the information we have to work with. Comparably, in the Assessing Suitability Review earlier in the year, the suitability levels for accumulation and retirement advice were in the region of 90 per cent.
The faults identified by the more recent work were once again fundamental issues: poor processes; lack of information regarding needs, objectives and personal circumstances; inadequate risk profiling and the lack of a comparison between DB and DC schemes.
So, what does this mean and should it be taken as a true cross section of what is happening across the country?
