If you provide advice on pension transfers, you will be interested in the key findings the FCA has released from its research in the area.
Work on pension transfers was one of the priorities identified by the regulator in its 2018-19 Business Plan, and we looked in October at how you can comply with the new rules set out under its ‘Improving the quality of pension transfer advice rules and guidance’ document.
What has the FCA been doing on pension transfer advice?
Last year, the regulator reported on its work to date on defined benefit pension transfers.
During 2018, it has collected further information, looking at another 45 firms and conducting further assessment work, which included file reviews and visits with 18 of those firms.
What did the regulator find?
The findings released this week showed that less than 50% of the advice the Authority reviewed was suitable.
This is unsurprisingly a concern – suitability is a big focus and a key driver for the regulator in much of its review activity. You can read more here on how to meet its standards on suitability and disclosure.
While the FCA accepts that because the results ‘are based on our targeted work [they] are…not representative of the whole market’, it does find it ‘concerning that…firms are still failing to give consistently suitable advice’.
The regulator’s Assessing Suitability Review, carried out in 2017, found that around 90% of advice on pensions and investments was suitable. The report issued this week believes that ‘It is unacceptable that pension transfer advice should persistently remain at such a low level in comparison’.
Where are firms failing on pension transfer advice?
The report outlines a number of specific areas where firms are falling short:
- Some firms had recommended transfers when the client’s needs and circumstances meant that keeping their DB pension would have been in their best interests.
- In some cases, firms advised a member to retain their benefits when it would have been suitable to transfer them.
- At several firms, senior management had failed to identify and mitigate the risks associated with DB transfer business, through lack of understanding and/or lack of oversight.
- Some firms have not increased resource and expertise in risk management (eg, advisory or compliance) in line with the volumes of transfer advice they are undertaking.
- In some cases, the transfer process is becoming commoditised, which can fail to take account of individual customer needs.
- Firms’ risk management tools are not always keeping pace with the growth of their pension transfer businesses, meaning that their regulatory and other failings are not being spotted.
On the other hand, the findings praise ‘some firms where the senior management had recognised the high risk nature of this type of business, and had put in place additional controls such as enhanced compliance engagement throughout the advice process’.
This enhanced compliance approach had helped those firms to ‘identify and rectify issues at the earliest possible opportunity’.
An in-depth look at suitability
The review found that less than half – 48.1% – of advice was suitable. 22.7% was ranked unclear, with firms failing to collect key information as part of their fact finding, or not conducting conduct sufficient analysis to demonstrate why their recommendation was suitable.
Although the regulator recognises that a small number of firms’ failings affected the overall suitability rates, it remains concerned that overall rates remain ‘significantly lower than those we observed in our Assessing Suitability Review, where we found 90.9% of retirement income advice suitable’. Transfer advice is by far the poor relation when compared to other retirement income advice.
Some of the reasons identified by the FCA for firms delivering poor suitability results were firms:
- Failing to obtain enough information about clients’ needs and personal circumstances
- Failing to consider the needs of the client alongside the client’s objectives when making a recommendation
- Not making an adequate assessment of the risk a client is willing and able to take in relation to their pension benefits
A full list of the (many) reasons reported are available as part of the FCA’s findings.
The regulator hopes that its new rules and guidance, released in March 2018 this year, will help firms to comply with their obligations.
Disclosure and communications with clients
The adequacy of firm’s disclosure and communications with clients was also reviewed as part of the FCA’s work.
62.7% of communications and disclosures were found to be non-compliant, with a further 9.1% ‘unclear’.
These failings were driven in part by what the regulator calls ‘failings in firms’ standard documentation, particularly in the way they present initial and ongoing fees’. (This is a topic we touched on in a recent blog, when we explored regulatory work on cost transparency.)
Firms’ failure to communicate in a way which was clear, fair and not misleading was also noted. Shortcomings here include providing long reports that failed to give clear recommendations, and using emotive language in documents discussing the pension scheme’s financial position.
What happens next on pension transfer advice?
Once the regulator has finished analysing the information it has requested from all firms in this market, it will kick off what it terms ‘a wide-ranging programme of activity with firms’ in 2019.
This activity is likely to be robust in tone: the FCA ends its findings with a stern warning that it expects firms ‘to pay close attention to our feedback and to review and amend their processes as appropriate…Firms failing to review or amend their business models in light of our concerns can expect serious consequences’.
If you provide pension transfer advice, it’s worth re-acquainting yourself with the new rules and guidance in the FCA’s PS18/6 and PS18/20. As part of its review, the regulator visited 18 firms to obtain more information on their processes. If you want to be prepared for a potential appearance from the Authority, you can read our whitepaper, How to prepare for an FCA visit, written by our very own Christopher Hall. The paper is free and you can download a copy here.
Nothing in this document should be treated as an authoritative statement of the law. Action should not be taken as a result of this document alone. We make no warranty and accept no responsibility for consequences arising from relying on this document.
Source: Perivan Technology
When you face business or regulatory challenges, we provide solutions that are tailor-made to your needs with a view to releasing your energies to focus on your clients.
We offer a complete solution with a range of cost effective, regulatory compliance and marketing products and solutions that are uniquely suited to supporting firms. Explore our full range today.