A speaker from the Financial Conduct Authority (FCA) has spoken of his concerns that a new pensions mis-selling scandal may lie ahead. At a seminar organised by the Tax Incentivised Savings Association (Tisa) in London, Brian Corr, the regulator’s head of retail competition, said:
“I don’t think that there is currently a mis-selling scandal as such, but we have identified that there is a potential problem.”
Perhaps the biggest issue in pensions regulation at present is the numbers of consumers seeking to transfer funds from defined benefit (final salary) schemes to defined contribution (money purchase) schemes. They may want to do this for example to allow them to exercise some of the pension freedoms that were introduced in 2015.
According to consultancy firm Xafinity, defined benefit transfers were up 166% in the first quarter of 2017 when compared to the same period in 2016.
The FCA graded the recommendation to transfer out of a defined benefit scheme as ‘unsuitable’ or ‘unclear’ in more than half of the cases it reviewed in a recent exercise. However, the regulator has classed 93.1% of all product recommendations as suitable in its recent reviews, meaning that pension transfers really are an area of concern.
Transfer values may be favourable at present, largely due to plummeting gilt yields, but firms advising in this area must exercise extreme caution. Firms that carry out these transactions must ensure they have rigorous procedures to ensure suitability of advice. All transfer advice must for example be checked by a pension transfer specialist who has the skills and experience to determine whether the advice is suitable, and who holds a specialist pension qualification such as G60 or AF3.
The FCA is once again consulting on the subject of new defined benefit transfer rules, and will publish a report at some stage in 2018. The consultation proposals include a requirement that an assessment of suitability should encompass: the role safeguarded benefits play in providing the level of income a client expects or needs, whether the investments in the receiving scheme meet the client’s risk profile, and the way in which funds will be accessed by the client following any transfer.
It is also proposed that a transfer value analysis should include a comparison showing the value of the benefits being given up.
Even under the existing rules, firms must ensure they carry out a transfer analysis, which carefully considers the likely benefits under the two schemes, the risks of each option and the costs and charges to be paid by the client.
In July 2017, David Samuel Watters, former compliance oversight officer at FGS McClure Watters and its successor firm Lanyon Astor Buller, was fined £75,000 – from his own pocket. This was after serious issues were identified with the pension transfer advice process at the firms.
Mr Corr has personal experience of problems in the pension marketplace, as he was involved in trying to sort out the last pensions mis-selling scandal when he worked at former regulator the Personal Investment Authority some 20 years ago. This was another occasion on which the scandal was sparked by a Government initiative, with up to two million people being incorrectly advised to leave generous occupational pension schemes and make use of personal pensions instead.
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