How to comply with the FCA new pension transfer rules

Oct 8th '18

Last week, the Financial Conduct Authority (FCA) published new rules aimed at improving the advice people receive when considering transferring their pension.


Its new document, Improving the quality of pension transfer advice – feedback on CP18/7 and final rules and guidance sets out the latest rules.


Why is the FCA focusing on pension transfers?

Pensions were one of the priority areas outlined in the FCA’s Business Plan in April. In March it published a consultation document that aimed to improve the process for transfers from defined benefit (DB) to defined contribution (DC) pension schemes.


The new rules bring into force the proposals from the consultation that have been taken forward.


What do the new rules cover?


The requirements are divided into:


  • Standards to meet before giving advice
  • Preparing to give advice
  • Providing advice
  • Charging structures
  • Cost benefit analysis



The rules require all pension transfer specialists (PTS) to hold a specific qualification for providing advice on investments by October 2020. This rule is designed to enable advisers to identify whether a proposed pension scheme and investment solution is consistent with the client’s needs and objectives. This requirement will also form part of the Senior Managers & Certification Regime.


Many PTSs already have both qualifications. The FCA does not believe it is necessary to have a specific single qualification for investment advice given along with a pension transfer, or to restrict advice to chartered financial planners.


Firms remain responsible for reviewing the competence of their employees on a regular and frequent basis, and for taking appropriate action to ensure they remain competent for their role.


The consultation also proposed amending the definition of a ‘pension transfer’ – this is not being taken forward at this time, as the regulator believes that its proposed new definition had not achieved the ‘simplification and clarity’ it was seeking. Instead, the Authority will use respondents’ feedback ‘to help us investigate alternative ways to simplify and clarify the definition’.


Preparing to give advice

Here, proposals suggested that pension transfer advice must take account of the proposed destination of the transfer funds if a transfer proceeded – both in terms of the scheme and the proposed investments within that scheme.


While the rules allow two separate advisers to provide the pension transfer advice and the advice on the proposed receiving scheme and its investments, the regulator expects that the two advisers will ‘work with the same information about the client and have in place robust processes to ensure that this happens’.


There will be no rules around the formal contracts or arrangements that firms need to put in place for these partnerships; this will be left up to individual firms to manage.


Triage services

Specific rules relate to the so-called ‘triage services’ advisers operate as part of their DB transfer advice process. This is where firms have an initial conversation with potential customers, designed to give them sufficient information to enable them to decide whether to go ahead and take advice on the transfer or conversion of their pension benefits.


The regulator acknowledges that triage can be useful, but has concerns that at times, it can stray into the provision of personal recommendations, rather than generic information.


It therefore plans to proceed with its ‘perimeter guidance’ on triage, which sets out where the boundary between advice and guidance lies.


There was concern, in the consultation feedback, that the proposed perimeter guidance would restrict firms’ ability to engage with consumers and filter out those who are not suitable candidates for a transfer.


The regulator, though, is proceeding with its proposals, based on its view that the responses showed ‘a lack of understanding that the provision of pension transfer advice is a different regulated activity from advising on investments’ and that because advice on pension transfer has a binary outcome (the member will choose either to transfer or not to transfer), the scope for providing guidance during triage is limited.


Providing advice

The consultation proposed changes to the way in which advice is provided to consumers, including:


  • assessing a client’s attitude to transfer risk
  • suitability reports for negative recommendations
  • pension increase assumptions


The regulator is proceeding with its proposed changes here, which will see updated Handbook guidance on clients’ attitudes to risk relating to both safeguarded benefits schemes and flexible benefit schemes.


The FCA says that ‘A robust assessment of the client’s attitude to transfer risk is an essential part of the advice process. The assessment should be detailed enough for the adviser to form a view of features which are appropriate to each client’s personal circumstances’.


The proposals also suggested that firms be required to provide a suitability report, regardless of whether their advice results in a recommendation to transfer, and that Handbook guidance should be amended to clarify that firms should provide an advice confirmation for both positive and negative recommendations (ie, whether they suggest that a client should proceed with a transfer or not).


This, too, forms part of the final rules. The regulator accepts that in some cases this may lead to increased costs, and that some costs may be passed on to consumers.


Charging structures

The proposals included discussion questions about the different charging structures used in pension transfer advice. One of the proposals which received the most feedback during the consultation was the proposal to ban contingent charging (when a fee for advice is only paid when a transfer goes ahead).


In light of the responses received, the FCA says that ‘Contingent charging is a complex area and the responses …[do] not show that contingent charging is the main driver of poor outcomes for customers’.


Instead of banning contingent charging, therefore, the regulator will carry out further work on the causes of poor advice.


Understanding and complying with new rules on pension transfers

The new Policy Statement is not a light read, at 58 pages long. But it is essential reading for any Compliance or pensions professional wanting to understand the updated rules around transfers.


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