The introduction of the retail distribution review (RDR) in 2013 was supposed to stamp out the commission-driven, sales-oriented behaviour that saw advisers incentivised with huge payoffs to push products.
Independent financial advisers suddenly had to charge fees and justify to clients why they had to pay for advice, something people mistakenly believed they had always gotten for free – or at least with no strings attached.
Martin Bamford, managing director of advisory firm Informed Choice, told International Adviser: “It is definitely a sort of hangover of the pre-RDR sales culture where the advice was not about planning but rather what type of product we could put these people into.
“Seeing some of the outcomes British Steel workers ended up in – these esoteric, high risk overseas funds… The regulated and authorised UK advisers should never have a reason to put people into those types of funds. There is just no need for it and it suggests that something untoward is going on in terms of payments between different parties.”
One feature of the British Steel pension transfers has been a resurgence in the use of contingent charges where an IFA only gets paid if a client is persuaded to act on a recommendation to proceed with a DB transfer.
Bad apples
The introduction of RDR did see a substantial number of advisers leave the market; some because they were unwilling/unable to make the transition and others because they headed to other less-regulated markets to continue earning commission.
“RDR helped in two ways, “Eugen Neagu, head of financial planning at Montfort International told IA. “It increased the level of qualification and introduced adviser charging.
“This probably got rid of a lot of the bad apples, but we still have a few people who put their interests before their clients’.”
British Steel
Members of the British Steel Pension Scheme were given three options after it was announced the scheme would be restructured.
They could transfer into a less generous workplace scheme, transfer to the UK’s Pension Protection Fund (PPF) or transfer their pension out completely.
It was the third option that drew the “vulture” IFAs and introducers, emboldened by the smell of a potential windfall.
One firm that introduced members to the now-collapsed IFA firm Active Wealth offered “sausage and chips” meals in meetings heavily geared towards pushing transfers on them, the Committee report stated.
Data suggests that around 2,600 pension transfers requests were processed between March 2017 and early February 2018, totalling £1.1bn ($1.5bn, €1.24bn).
Neagu believes that the steel workers were “taken a bit by surprise” and were not prepared to deal with having to transfer their pensions.
“In hindsight, everyone could have done better. The trustee especially. The regulator should also have understood that this would be a huge issue. They started doing some training with advisers in November but that was probably after much of the damage had already happened.”
Massively let down
Bamford said: “In the case of British Steel, the members of that pension scheme were massively let down; by the regulators, the scheme itself and the trustees.
“But also by the financial adviser community initially.”
“We have to recognise that some members of the financial advice community have done some amazing things since the controversy, but it should never have got to the stage where, as the Work and Pensions Select Committee said, there were these vulture financial advisers swooping in and picking over the carcass of the scheme.
“They were giving wholly unsuitable advice to people who did not have the capacity or education to understand what was going on and I think it reflects very poorly on our profession as a whole,” Bamford said.
Regulatory oversight
Bamford added: “One of things the FCA said, when it transferred from the Financial Services Authority to the FCA, was that it would get involved earlier and regulated intervention would become a regular process.
“We must have earlier intervention, because, by the time they step in after the intervention it is too late.”
Neagu also believes that the regulator isn’t necessarily looking at the big picture. Having attended a meeting with the FCA in July 2017 to discuss defined benefit pension transfers, he said that “the regulator was missing the big picture on contingency charging and looking more at details that may or may not be important”.
He warned that the practice of charging only for when a transaction is done “creates a bias for clients to go to poor advisers”.
“I have found many times, even with steel workers, that they do not want to pay fees. They then go to advisers who charge on a contingency basis and are, in my opinion, less qualified and less knowledgeable.”
Blow the whistle
Neagu has called on the advice industry to be more proactive and whistleblow when advisers see firms or peers acting badly.
He has done so himself and within weeks the firm lost its permissions.
FSCS
Failing to act and self-police allows bad advisers to remain in the industry and will cost the good firms and advisers in the long run, as their Financial Services Compensation Scheme (FSCS) levies will rise to compensate clients for bad behaviour.
Bamford said: “One of the big consequences of the British Steel fiasco is that there is going to be huge payments now to the FSCS. So, funds like mine, that did not advise British Steel members, end up picking up the tab for those that did it poorly.
“Unless we have early sector regulation that cycle continues where we pay a huge amount for regulation and we pay a huge amount for FSCS levies for professional indemnity (PI) insurance. We have to hold capital adequacy. So, this whole thing is just indicative of a failed regulatory system again.”
