The Financial Conduct Authority said it has “repeatedly made clear” its expectations of financial advisers regarding defined benefit transfers but that “too much advice is still not to an acceptable standard”.
It a strategy letter to financial advice firm chief executives and directors, published on Tuesday; Debbie Gupta, director of life insurance and financial advice supervision, set out the regulator’s approach to tackling “key areas of concern”.
Unsurprisingly, DB pension transfers made the list.
“We […] remain concerned firms are recommending large numbers of consumer transfer out of their DB pension schemes despite our stance that transfers are likely to be unsuitable for most clients,” she wrote.
Gupta added that the FCA “will continue to focus on this area until the quality of pension transfer advice reaches the same standard as the wider advice market”.
Suitability review
Ensuring that advice and solutions meet client needs was a core message in the letter, its intention clearly to leave financial advisory firms in no doubt of the FCA’s expectations as to how they act and treat customers.
Following on from the FCA’s assessing suitability review in 2017, Gupta said the watchdog will be carrying out further work in this area.
“The [follow up] review will focus on initial and ongoing advice to consumers on taking an income in retirement.”
Beware scammers
A shadow looming over both DB pension transfers and suitability requirements is the rise of “increasingly sophisticated” fraudsters.
Gupta outlined five key areas of risk firms need to monitor:
- Authorised firms receiving introductions from introducers or lead generators, particularly, where the introducer has inappropriate influence on how the authorised firm carries out its business, such as where the introducer influences the final investment choice;
- Authorised firms delegating regulated activities, particularly where they outsource their advice process to unauthorised entities or other authorised firms that do not have the relevant permissions, or are not their appointed representatives;
- Principal firms having inadequate oversight of their appointed representatives;
- Authorised firms failing to undertake adequate due diligence on products and services they recommend; for example, non-standard, illiquid investments; and,
- Investments containing non-standard assets, complex structures and/or high charges.
She provided contact details for the FCA’s whistleblowing hotline and its firms queries team if there are suspicions that a company or individual is involved in wrongdoing.
A recent article by International Adviser, however, suggested that whistleblowers are losing faith in the regulator, after it seemingly failed to act on tip offs and reports about firms in the past.
Do you have adequate cover?
Another cloud hovering over the UK financial advice market is professional indemnity (PI) insurance, which has become prohibitively expensive and pushed a number of firms to stop offering DB pension transfer advice.
Gupta wrote: “We are concerned some financial advisers are holding inadequate financial resources and/or PII for the business activities they carry out.”
She warned “it increases the risk of firms being unable to put things right where they have caused harm to their clients”.
“The inability to compensate consumers, and the transfer of these costs to other market participants via the [Financial Services Compensation Scheme] levy, is unfair and places an unnecessary burden on other firms.”
She added that the FCA has seen cases “where firms have exclusions for particular business lines”, such as providing advice on DB transfers.
Others have “sub-limits on particular business lines below the minimum requirements”, such as less than the €1.85m (£1.58m, $2m) for insurance distribution directive (IDD) firms.
“Some firms have excesses on claims which are at such a level as to render the cover materially ineffective.
“In those circumstances, we take the view the exclusion/excess or sub-limits unreasonably limit cover and do not comply with our rules,” Gupta wrote.
Any other business?
The letter to advisers touched on three other areas; the ban on the promotion of speculative mini-bonds to retail consumers, the senior managers and certification regime (SMCR), and the UK’s departure from the European Union.
Other than reiterating its expectations that advisers follow the established rules and meet deadlines; little was added.
With regard to the EU withdrawal, Gupta wrote: “We expect you to consider how the end of the implementation period will affect you and your customers, and what action you may need to take to be ready for 1 January 2021.”
