The Financial Conduct Authority (FCA) has said it is concerned about overseas firms targeting the UK pension benefits of defined benefit (DB) scheme members living overseas.
In a guide published on 27 April, it highlights the increased risks to consumers when overseas firms refer DB scheme members to UK firms for pension transfer advice and gives its expectations of UK companies.
The FCA said: “UK firms engaging with overseas firms or offering advice to scheme members based outside the UK should have regard to their regulatory responsibilities.
“This includes the Consumer Duty, particularly to act proactively to deliver good outcomes for retail customers and to avoid causing foreseeable harm to retail customers.”
Overseas advice model
The FCA said that the ‘overseas advice model’ works as follows:
- The member, based overseas, is approached by an overseas firm about transferring their UK DB pension benefits into an alternative pension arrangement. This is often an overseas pension arrangement or a UK-based international self-invested personal pension (Sipp) holding offshore investments;
- Where the scheme member has a cash equivalent transfer value (CETV) over £30,000 ($37,000, €34,000), they must receive ‘appropriate independent advice’ from an FCA-authorised firm before scheme trustees can transfer pension benefits to a defined contribution (DC) scheme. This is a requirement in section 48 of the Pension Schemes Act 2015. This requirement applies whether the member is based in the UK or overseas. Members with a CETV below £30,000 may also choose to receive transfer advice or arrange transfers without advice;
- The overseas firm usually introduces the scheme member to a UK advice firm solely for advice on transferring their DB pension funds. The overseas firm will usually advise on or arrange the proposed arrangement for the transferred funds;
- Once it’s confirmed that the member has received ‘appropriate independent advice’ on the transfer from the UK firm and on the member’s request, the overseas firm contacts the UK DB scheme trustees to arrange the transfer of the member’s pension benefits into the alternative pension arrangement and offshore investment; and
- DB scheme trustees will review the application to transfer and have separate duties that are set out in the detailed guidance from the Pension Regulator (TPR).
The FCA added: “Overseas firms are not FCA authorised but may be regulated by an overseas regulator. The level of consumer protection available in relation to the activities of these firms will depend on the overseas regulatory regime.”
Outcomes
The UK regulator gave five situations where the likelihood that overseas advice models result in poor consumer outcomes increase:
- UK advice firms fail to carry out adequate due diligence on the activities of overseas firms involved in the recommendation;
- The UK advice firm has little or no interaction with the member, relying on information provided by the overseas firm;
- The UK advice firm confirms ‘appropriate independent advice’ to DB scheme trustees where they have given abridged (not full) advice to the member;
- The UK advice firm does not adequately consider the effect of all charges on the member in their advice on the transfer, where charges on overseas investment products can often be complex and, in some cases, higher than the potential investment growth on a realistic projection; and
- The UK advice firm recommends that the member remain in their scheme. The member subsequently becomes ‘insistent’ and requests the UK firm arrange a transfer. There are indications of coaching or that the member was acting under the influence of the overseas firm.
Harm prevention and detection
The FCA said that UK firms should consider the risk of consumer harm and how you can support good consumer outcomes.
It said that firms should ensure they have adequate procedures, systems, and controls to detect and prevent financial crime and carry out robust due diligence of the overseas firm when engaging with them.
Once an arrangement has been entered into with an overseas firm, the FCA said UK firms should ensure that they carry out sufficient due diligence. This includes by:
- ensuring each introduction has been sourced legitimately;
- carrying out adequate oversight and monitoring of the activities of the overseas firm; and
- ensuring they have contact with the introduced member.
The financial watchdog added: “If there are concerns about poor consumer outcomes you can take steps to terminate the relationship and alert the relevant authorities where you suspect scam activity or concerning transfer practices.”
Consumer Duty
In relation to the FCA’s Consumer Duty, UK advice firms will be seen as manufacturers of a DB transfer advice service.
Firms will need to consider if overseas clients are in the intended target market for the service and regularly review the service to ensure it remains appropriate for the target market
The FCA said: “Where we become aware that a firm is engaging in practices that are likely to result in significant consumer harm, we will take appropriate action. For example, where we suspect serious misconduct, we will consider an enforcement investigation.”
