The Financial Conduct Authority has said it has stopped two dozen firms doing defined benefit (DB) pension transfers over concerns of the quality of their advice in the past year.
The UK regulator has dedicated a lot of its resources to investigating the DB transfer market since the high-profile British Steel Pension Scheme (BSPS) scandal in early 2018.
Chris McGraw, head of investment intermediaries and scams at the FCA, said during a podcast released on the regulator’s website: “Where we see significant bad practice in firms, we will stop those firms and we’ve stopped 24 of the 63 firms we have assessed so far this year.
“That’s quite a high proportion of them.
“Where those firms can fix the problems we’ve identified, we will consider allowing them to resume DB transfer business, but only once they have satisfied us that they’ve made the appropriate fixes to the problems that we’ve identified.
“When they can’t fix the problems or show a lack of willingness to fix the problems, they will exit the market.”
Problems in the market
The watchdog has not held back in its criticism of the DB market over the last year.
In June 2019, the FCA said it was disappointed with the number of advice firms recommending people transfer out of DB pension schemes.
It found that 2,426 firms had provided advice on DB pension transfers. Of them, 1,454 firms had recommended 75% or more of their clients go ahead with the transfer.
McGraw added: “Transfer rates are too high. We start from a position, as a regulator, where it’s best not to transfer out of a defined benefit scheme, unless there are specific individual circumstances that make that so.”
He described is as “a really complex decision”.
“People need advice that’s actually personalised to them, individually.
“Some firms are doing this really well. But other firms have not managed the conflict between the fees they charged, often on a contingent basis, and what is in the best interest of their client, individually.
“Also, some of them have not demonstrated the competency they need, in terms of what they need to consider and make recommendations to their clients.
“And that’s resulted in really poor advice.”
Strict regulator
McGraw added that the FCA will carry out a no-nonsense approach to poor DB transfer advice.
“Across the investment market, over 90% of advice is suitable, generally.
“But in the DB world, over the couple of last couple of years, we’ve done some work and we’ve found that probably that suitability rate drops to about 50% in this specific area.
“And that’s just simply not good enough.
“When we go out and visit [advice firms], and we actually see serious misconduct, we will take enforcement action.
“This can result in fines and banning people from operating in the financial services industry.
“And if we believe consumers have lost out from poor advice, we will make sure firms take appropriate steps to put those customers right.”
Catalytic PI insurance market
It is not only the FCA that is taking firms out of the DB transfer market. The rising costs of staying in it are starting to take a toll.
The BSPS scandal, the more than doubling of the Financial Ombudsman Service compensation scheme limit and the FCA’s supervisory review uncovering poor practice have spooked professional indemnity (PI) insurers.
They have either pulled out of the market or raised premiums by 500%, which has brought some financial advice firms to the conclusion that they cannot afford to stay in the DB transfers space.
Keith Richards, chief executive of the Personal Finance Society (PFS), who also spoke on the podcast, added: “We are seeing a slight shrink in the market now.
“Not least because the FCA are increasingly focused on supervisory work and honing in on DB transfers.
“It’s hardened the PI market even further, so some firms cannot now secure PI insurance going forward.
“That does cause us some significant worry about the impact that may have in the future.”
He said that 25 firms have given up their DB transfer permissions since the FCA requested those not giving pension transfer advice relinquish them.
There are, however, over 1,000 firms that have retained their permissions.
Proactive
Richards also said the FCA could have been quicker coming out with more decisive guidance around DB pension transfers.
“They certainly could have reinforced the position that it was unlikely to be in most people’s best interest,” he added.
“For me, that was one of the learning curves for the regulator. Not to be too frightened about coming forward quickly in areas where it would have been a ‘no regrets’ position.
“It would have been easier to relax back from that, rather than stand back and then come in afterwards.”
