The Financial Conduct Authority (FCA) has issued extensive guidance on how firms should handle advice on pension transfers (switches out of occupational pension schemes) and pension switches (switches from one personal pension plan to another).

At present, FCA rules say that firms should assume that a transfer is not suitable unless they can demonstrate otherwise. 19.1.6 of the FCA’s Conduct of Business Rules states that:

“When advising a retail client who is … a member of a defined benefits occupational pension scheme, or other scheme with safeguarded benefits, whether to transfer, convert or opt-out, a firm should start by assuming that a transfer, conversion or opt-out will not be suitable. A firm should only then consider a transfer, conversion or opt-out to be suitable if it can clearly demonstrate, on contemporary evidence, that the transfer, conversion or opt-out is in the client’s best interests.”

Extreme care is also required when a firm advises on a potential switch out of a non-occupational or personal pension scheme that includes safeguarded benefits, such as guaranteed annuity rates and guaranteed minimum pensions.

The FCA calls on firms to 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. The FCA says it has seen examples of firms basing recommendations solely on the critical yield of the two schemes, and warns against adopting this practice.

To advise on pension transfers, firms require special permission from the FCA. If within these firms, advice on a transfer is given by an individual without a specialist pension qualification (such as G60 or AF3), then their advice must be checked by someone who is a pension specialist.

The regulator recommends that firms follow these steps when dealing with insistent pension clients – clients who receive advice but choose to take a different course of action to that recommended:

1. Give a clear and concise recommendation, ensuring the client understands what is being recommended
2. If the client indicates that they wish to take an alternative course of action, clearly explain that this is against the firm’s advice, and make them aware of the risks involved with the route they wish to take
3. Clearly document on the client file the fact that the client has chosen to go against the professional advice they received

Firms should note that suitability reports are required for insistent client cases. The same level of information needs to be provided to the client as would be the case had they taken the same course of action after following the adviser’s recommendation. The FCA has also previously recommended that firms obtain a written statement from insistent clients, which explains, in their own words, why they chose to disregard their adviser’s recommendation.

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.