The greatest concern for the UK regulator is unsuitable advice given about defined benefit (DB) pension transfers, according to its director of life insurance and financial advice supervision.
Debbie Gupta said at a recent industry conference that it should be “no surprise” the DB market is number one on the Financial Conduct Authority’s (FCA) improvement list.
“The findings from our DB work show that only around 50% of the advice given on DB transfers was suitable,” she said. “And when you consider the volume and value of DB transfers, there’s much to be concerned about.
“The level of suitability – at 50% on such a significant volume of investments – is simply not good enough, and the potential for consumer harm is far too high.
“This can be, and must be, improved. But change has been slow. And we are still seeing the same mistakes.”
In June, the FCA published data which showed over 230,000 DB scheme members had received transfer advice between in April 2015 and September 2018.
The average transfer value was £352,000 – equivalent to a total value of £82.8bn ($103.4bn, €93.5bn).
Tackling the issue
Gupta said there are four broad areas of improvement for the FCA to undertake.
They are:
- Improve standards, particularly in areas where the FCA knows advice and services are falling short;
- Target firms that cause the most harm, using data and intelligence;
- Support consumers to understand what they have a right to expect from their advisers; and
- Help advisers by sharing what it has learned with do’s and don’ts of advice giving.
She went on to say that the most valuable way of tackling the firms that cause the most harm is through intelligence gathered from the financial advice community.
“When the financial advice community reaches out to us to tell us about a problem, we can act on this swiftly,” Gupta said.
“We believe this type of approach – targeting firms – will help identify problem firms sooner, act more speedily and hopefully reduce the number of financial advice firms whose liabilities end up at the Financial Services Compensation Scheme.”
Supporting financial advisers
Gupta added that shortcomings in suitable advice are down to poor fact finding and inadequate recording client needs and objectives, as well as evidencing the correlation between the IFA’s recommendation and their client’s attitude to risk.
In terms of fact finding, she said that “the foundation of suitable advice is getting to know your client and understanding their circumstances and motivations”.
This means:
- Spending sufficient time getting detail on a client’s needs and objectives provides a secure foundation for the advice process;
- Capture and record essential information;
- Capture and record soft facts;
- Think about different fact-finds for different clients or different types of advice;
- Consider recording client interactions; and
- Be brave. Challenge clients. Offer alternative.
Gupta said that one of the “main causes of unsuitable advice is where the risk level of the recommended solution does not match the risk the client is willing or able to take”.
“We still see advice where the proposed solution is not aligned with the client’s attitude to risk,” she said.
“We expect to see an alignment between the client’s attitude to risk and your recommendation, including an assessment of how prepared they are to give up a guaranteed lifetime income for one which comes with no guarantees about value or sustainability.
“Make your records clear.”
