The Financial Conduct Authority (FCA) has not only confirmed the new rules that now apply to pension transfer advice but has also commenced a consultation on additional rule changes.

Most of the new rules are effective immediately, with the new rules regarding the new analysis requirement coming into force on October 1 2018.

A pension transfer is any transfer of funds out of an occupational pension scheme into some form of personal pension arrangement.

The new rules that firms are now required to comply with include:

  • All advice on the transfer and conversion of safeguarded benefits should result in a personal recommendation being made to the client – it is no longer permissible simply to provide general guidance in these circumstances, and a recommendation must be made to the client as to whether they should transfer or stay put
  • An adviser should still start from the assumption that a transfer out of an occupational pension scheme will be unsuitable, and only deviate from this position if there is clear evidence to the contrary. In this case, the FCA has chosen to retain its existing rule, and has abandoned its original proposal to allow advisers not to use this assumption
  • When checking advice given by one of the firm’s advisers, a firm’s Pension Transfer Specialist must confirm that the personal recommendation is suitable; and inform the firm in writing that they agree with the advice given, before any report is sent to the client
  • Instead of the transfer value analysis that firms typically carried out when assessing the suitability of a pension transfer, firms will now be required undertake a personalised analysis of the consumer’s options and a comparison to show the value of the benefits being given up. The “appropriate pension transfer analysis”, or Apta, should consider a number of issues, including: taxation implications, the impact on access to state benefits, and what the situation might be if the client lived longer than normal life expectancy

The consultation paper proposes that:

  • Pension Transfer Specialists will be required to hold a Level 4 Diploma, as is currently required to give investment advice
  • Firms will be required to consider not just a client’s attitude to investment risk, but also their attitude to the general risks associated with a transfer
  • Firms will need to produce a Suitability Report even if their recommendation is not to proceed with the transfer

Finally, the consultation paper invites a discussion on the appropriateness of ‘contingent charging’. This is where the firm would only charge a fee if the transfer proceeded, which inevitably gives rise to a possible conflict of interest, in that the firm has a financial incentive to recommend a transfer, regardless of whether it is actually in the client’s interests.

Christopher Woolard, the FCA’s Executive Director of Strategy and Competition, said:

“Defined benefit pensions are valuable so most people will be best advised to keep them.  However, where people are considering a transfer, it is vital that they get good advice to enable them to make an informed decision.

“We are also looking at whether further changes are needed to improve the quality of advice in this area.  In particular, we recognise that there is an inherent conflict of interest when advisers use a contingent charging model so we are asking for views on whether we should ban contingent fees for pension transfer advice. Defined benefit pension transfer advice continues to be a key area of focus for the FCA.”

As mentioned by Mr Woolard, the FCA has been concerned about the quality of firms’ pension transfer advice for some time. In October 2017, the FCA published the final results of its supervisory work on pension transfer advice, and of the files reviewed during this study, in only 47% of cases could the advice be shown to be suitable, and in only 35% of cases were the products and funds recommended for the new scheme judged to be suitable.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.