18Dec

The suitability of pension transfer advice has been a key area of focus for the Financial Conduct Authority (FCA) for some time. In December 2018, the regulator published more key findings of its recent work in this area.

In 2018, the FCA has collected pension transfer information from 45 firms, which led to further assessment work, including file reviews and visits, on 18 of them. Since April 2015, these 18 firms have advised 48,248 clients on their Defined Benefit (DB) pension schemes, which resulted in 24,919 actual pension transfers.

After the intervention of the FCA, two of these firms voluntarily withdrew from pension transfer advice and a further two varied their business models and surrendered their pension transfer advice permissions. Something like this happening in four of the firms in the sample suggests that the previously identified failings remain fairly widespread across the sector.

The FCA continues to report that less than 50% of the transfer advice it sees is suitable. 48.1% of cases were classed as ‘suitable’ by the FCA, with another 29.2% being ‘unsuitable’ and the remaining 22.7% being ‘unclear’. Noting that across all products, the FCA believes that more than 90% of advisers’ recommendations are suitable, the regulator says:

“It is unacceptable that pension transfer advice should persistently remain at such a low level in comparison to investment advice.”

Of the 32 cases from the four firms which either varied or surrendered their permissions following the FCA intervention, only one of these 32 was deemed to be a suitable recommendation.

Whether or not they have fallen under the FCA’s radar in 2018, all firms giving transfer advice are urged to respond to the issues raised:

“We expect firms to take prompt action on our findings and to check that their business model and advice processes do not exhibit similar failings. Firms should review their risk management approach and controls to ensure that they are effective in mitigating potential harm to customers.”

The FCA adds that although its 2018 activities may have focused on 45 firms, every firm with permission to advise on defined benefit pension transfers has now received some sort of data request from the regulator. This will most certainly remain an area of focus for the FCA in 2019 and beyond.

Areas the FCA remains concerned about include:

  • Senior management not understanding the risks involved with transfer business
  • Firms failing to adequately monitor their transfer advisers and specialists
  • Advisers failing to obtain enough information about clients’ needs and personal circumstances
  • Advisers not making an adequate assessment of a client’s risk tolerance
  • Firms using generic justifications for a transfer, such as saying it was “the client’s objective to take control of their pension.”
  • Advisers failing to take proper account of the client’s desired retirement age
  • Advisers failing to consider the client’s actual current state of health, and instead relying on standard mortality statistics to predict life expectancy
  • Firms writing long suitability reports with unclear recommendations
  • Firms overstating the benefits of transferring and downplaying the risks

Finally, the latest report warns of possible enforcement action for firms that fail to comply:

“We will not hesitate to take action against any firm that continues to present harm to consumers.”

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