This comes at the same time as an extraordinary level of regulatory scrutiny. The FCA is currently collecting data about transfers from all relevant firms while the various sample reviews of the past three or four years show a high percentage of unsuitable transfers and cases where suitability cannot be proved.
Following a request in late 2015 for information from six specialist pension transfer firms with 29 detailed file reviews from four firms, the FCA found 24% or 7 contained suitable advice, 35% or 10 contained unsuitable advice and 41% or 12 had unclear advice.
In 2016, it looked at 16 additional firms including 9 visits and 71 sample files finding 38% or 27 were suitable, 34% or 24 unsuitable advice and 28% or 20 were unclear
Late last year and in early 2018, the regulator looked at British Steel transfers. From 129 files from 21 firms, 51% were deemed suitable, 33% unsuitable and 16% unclear.
FCA disconnect
It is these sorts of findings combined with the sheer scale of business transferred that has many advisers worried.
David Penney, director with Penney, Rudder & Winter says: “I am very worried. I fear that the FCA’s view of a suitable transfer may in many cases be very different to many advisers’ view.
“In particular, anyone using generic reasons such as ‘death benefits’ and ‘flexibility’ may find themselves being subject to some serious scrutiny. I have been saying this for three years now, but I can only see this situation escalating and the regulator will ultimately need to decide whether or not this warrants a full scale review.
Beneficiaries
“The beneficiaries of all these transfers are DFMs and pension providers. I think everyone has seen a major uptick in AUM due to DB transfer money, just look at inflows over the past few quarters.”
Addressing the issue of where the assets are ending up, the Lang Cat consulting director Michael Barrett says: “We have been following the trail of money as far down as we can. We get sales figures from every platform provider. Sales were buoyant for all four quarters. It was pretty much all pension wrappers. Some were reporting 70% going into their pension wrapper.
“When we ask the next question – how much is DB money and nobody answers. We get told it’s not all DB. There is DC but it is clearly boosting it. It can go pretty much anywhere – the large companies, DFMs, platforms, asset managers. Everyone is shaking the tree to see what comes out it.”
Regulatory review
But what of Penney’s concerns regarding the risk of a full review?
Compliance consultant Adam Samuel says: “The thing about the pension review is that it destroyed so many careers, I don’t think the regulator will want to do it again. What regulators do now is a mixture of all three – FCA, FOS and FSCS in a selective sort of way. They never do a proper pension review because they will never be able to deliver the process properly.
“They get the worst sinners, who can pay for it, to do a full review. They may put some small IFAs out of business. You will end up with some complaints to FOS. But I don’t think smaller IFAs will survive that.”
He says that there is definitely some protection for the elevated levels of transfers so any review calculations will reveal fewer cases of loss, and where there are losses they should be smaller.
Scurrilous IFAs
However, there are likely to be some pretty unpleasant looking cases.
“Where people have enhanced values, and they haven’t been very good, but firms have just processed the transaction and called them an insistent client, there could be some very grown up losses because we don’t know yet what the scheme benefits are and so what has been given up.”
He recently convinced an employer undertaking a transfer value exercise to make sure a separate adviser was responsible for the advice to transfer.
“The second adviser recommended to every individual in question that they didn’t transfer. A more scurrilous IFA might have done the transfers. You could end up with a lot of stuff at the FSCS.”
Samuel adds that he also knows that some transfer analysis done by big providers may not stand scrutiny and is aware of one case where the analysis was done on the basis of the wrong employer pension fund! He says this area could generate some serious losses.
There remain a host of questions to be asked about the transfer boom and the resulting increase in business. Short of the receiving life offices, fund managers and platforms providing the information themselves, it may be a case of understanding the switch in general terms and examining the above trend asset growth. Whether it largely stays were it is currently invested may depend on decisions by the regulator.
