The Financial Conduct Authority (FCA) has issued a Warning Notice to the compliance oversight officer of two firms, saying that his actions put clients “at serious risk of receiving unsuitable advice” regarding enhanced transfer value pension transfers.
As with previous FCA warning notices, neither the individual nor the firms concerned is named. The individual now has the right to make representations to the FCA’s Regulatory Decisions Committee, before this Committee decides if enforcement action is appropriate.
There are two very important lessons to be learnt from the issue of this Warning Notice, Firstly, that the FCA regards pension transfer advice – recommending that clients switch out of occupational pensions – as a high-risk area, and secondly that the FCA is ever more willing to take action against individuals, rather than against their firms, when wrongdoing occurs.
Around 500 clients of the firms in question are said to have transferred a total of £12.7 million of pension benefits from defined benefit (final salary) schemes to defined contribution (money purchase) schemes.
The FCA alleges that, over a period of three years, the firms’ compliance officer:
• Did not take reasonable steps to understand his obligations as a compliance oversight officer, or to understand the risks associated with enhanced transfer value business
• Did not effectively supervise the advice being given by the firms
• Failed to ensure that an external compliance consultant appointed to review the advice process was suitably qualified
• Failed identify “obvious flaws” in the advice process
• Did not identify and manage potential conflicts of interest concerning commission paid to his two firms by the provider to which the pensions were transferred
• Failed to review the firms’ processes and procedures given that the latest phase of MiFID will shortly be implemented
Since the issue of the Warning Notice, the FCA has issued extensive guidance on its website regarding how firms should handle advice on pension transfers.
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 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.