The Financial Conduct Authority (FCA) has set out a range of measures designed to address weaknesses across the defined benefit (DB) pension transfer market.
It includes steps to reduce conflicts of interest by banning contingent charging, as well as help for advisers “who want to do the right thing and provide good quality advice to their customers”.
The package also includes further support for customers who are considering whether to transfer out of a DB scheme or who have already transferred out.
To assist financial advisers, the regulator has launched a guidance consultation designed to help them put in place better processes to ensure consumers get suitable advice, as well as help firms identify weaknesses in their existing operations.
The FCA said it will:
- Ban charges for advice where consumers only pay when a transfer or pension conversion proceeds, except in certain limited circumstances;
- Require firms to consider an available workplace pension scheme as a receiving scheme for a transfer;
- Enable firms to give a short form of advice (abridged advice);
- Empower consumers to make better decisions by improving how advisers disclose charges and requiring checks on consumers’ understanding during the advice process;
- Enable advisers to give better quality advice and improve professionalism by introducing specific continuing professional development (CPD) on pension transfer advice;
- Set up data collections that advice firms must give the watchdog to improve its ability to supervise the sector; and
- Amend technical areas of its rules and guidance to clarify and extend existing requirements.
More work left to do
Christopher Woolard, interim chief executive of the FCA, said: “What we have set out today builds on the work we have been doing and reflects our determination to improve standards in this market.
“Customers need to have confidence that the advice they are receiving is right for them. The steps we are announcing today will drive up standards.”
The steps were also to help “good advisers, who often advise to stay put, to compete in the market”, the FCA said.
Eugen Neagu, director of N2 Asset Management told International Adviser that he welcomes the changes.
“My view, as expressed in the response to the consultation, is that we need to improve the professionalism of the pension transfer specialists, their knowledge in choosing assumptions and making comparisons.
“There is still a lot of work left to do in this area. Myself and a few other financial advisers have built a group on Facebook, where we discuss cases and practices, and we are willing to offer help to pension transfer specialists who want to improve.”
Contingent charging
The FCA will implement the ban on contingent charging in most circumstances, with only a few consumers exempted, such as those suffering from serious ill-health or experiencing serious financial hardship.
In the minority of cases where contingent charging is permitted, advice firms will have to charge the same sum, in monetary terms, for advice to transfer as they charge when the advice is non-contingent.
The ban will come into effect on 1 October 2020.
To address ongoing conflicts, advisers must now consider an available workplace pension as a receiving scheme for a transfer and, if they recommend an alternative solution, explain why that alternative is more suitable.
The UK watchdog said this will help “reduce the need and costs for ongoing advice”.
Tom Selby, senior analyst at AJ Bell, said: “While the FCA was unable to find a smoking gun in its data analysis of defined benefit transfers and contingent charging, it has been clear for some time the regulator is uncomfortable with the inherent conflict of interest that exists within the fee model.
“Banning contingent charging was always a balancing act for the regulator, potentially reducing the number of customers who receive inappropriate advice but at the same time creating the real risk people who would be better off transferring are unable to pay for advice as a result.”
Abridged advice
The FCA also wants firms to stop giving advice when delivering triage services, for example offering generic information about what a transfer is and the dangers that come with it.
It has introduced guidance to stop this, which becomes effective from 15 June 2020.
Also, it will also implement proposals allowing advisers to provide an abridged advice process, which will help consumers access initial advice at a more affordable cost.
The abridged process “can only result in a recommendation not to transfer or a statement that it is unclear whether a consumer would benefit from a pension transfer without giving full advice”, the FCA stated.
“We have always supported the FCA’s abridged advice concept and we hope advisers will look at this in detail to see if it can help them ‘filter out’ DB members not suited to transferring,” said Steven Cameron, pensions director at Aegon.
“However, it is yet to be seen if this approach can be made sufficiently cost-effective for its wide-spread use, particularly as it must still involve a pension transfer specialist.”
