Who’s to blame for the pensions transfer debacle?

Some accuse the FCA of using skewed data to paint a negative picture, others fault advisers

IFAs among 24 firms UK compensation scheme declares in default


The most recent Financial Conduct Authority (FCA) research into pension transfers has sparked a furore about whether it is a fair assessment of the current state of advice and a parallel debate about whether it is advisers or the FCA itself which is to blame for the continuing problems.

The FCA put its views out in a release entitled Key findings from our recent work on pension transfer advice in early December and it made for grim reading.

The regulator said: “We are disappointed to have found that less than 50% of the advice we reviewed was suitable” although it added the proviso that “our results are based on our targeted work and are therefore not representative of the whole market”.

It added that the review involved 18 firms’ processes and reviewed the advice they gave on 154 transfers. It found the advice for fewer than half, 74 (48.1%), of these suitable, 45 (29.2%) unsuitable, and 35 (22.7%) unclear.

Th regulator noted that it compared with results in previous phases of work in this area which found 49% of advice was suitable, 33% unsuitable and 18% unclear.

Skewed data set

Advisers have argued that while the numbers are concerning, the figures improve significantly if you strip out the worst offenders.

This use of the statistics has also come under fire from professional bodies. The Personal Finance Society has voiced concerns that the report involved an “insufficient sample review” and warned of scaremongering.

This is echoed by providers too. Aegon pensions director Steven Cameron says: “While the headline statistics in the FCA’s latest publication on DB transfer advice don’t make great reading, they are heavily skewed by the four firms who varied or surrendered permissions, where only one of 32 files was found suitable.

“With the FCA having published new guidance earlier this year, the focus should be on ensuring future advice is of a high quality, addressing the weaknesses of the past. Areas of concern highlighted in these latest findings are in line with those already addressed in the latest guidance. Taken together, this latest report and the 2018 guidance make FCA expectations very clear and advisers who take these on board should have much greater confidence in their advice. It is encouraging to see the FCA’s positive findings here for specialist transfer firms.”

Advisers failing in their area of expertise

Others however have taken a dim view of what it means for the advice sector.

Former regulator and now leading compliance consultant Rory Percival, writing on his website, put the blame squarely on advisers. He says: “The tone of the notice is frustrated and even threatening which is entirely fair based on the very long list of issues it has found. If you are involved with DB transfers and haven’t read the notice, you should, you really should.

“So what does it say?  It says you’re rubbish, basically, although it qualifies this by saying that the sample of firms and files is not representative of the whole of the market. But don’t use this as a reason to think this doesn’t apply to you, it does.  You might say the problem is with the large firms, the vertically integrated firms, the outsourced firms, the restricted firms, the networks.

“Anyone but you. You no doubt think you are very diligent with your clients, undertake a full analysis and give suitable advice.  Well, I don’t buy this argument. Indeed, several of the commenters after articles about DB transfers take this approach of blaming others but, from some of their comments, I have significant concerns that the problem does sit with them and that they are providing unsuitable advice.

“Often people say the FCA should have done X or Y, or should have acted earlier, were asleep at the wheel, is not fit for purpose.  But it’s not the FCA’s fault. It’s your fault. Yes, yours, the advice sector. You might say that the FCA should have made its position on advice clearer, earlier. Nonsense. You are advisers, this is financial advice, your area of expertise is providing suitable advice. But you haven’t been, not consistently enough. It is you that are failing in your area of expertise.”

Regulator could have been more proactive

Yet not all former regulators agree that the blame falls fully on advisers. Director of the Financial Inclusion Centre and former chair of the FCA risk committee Mick McAteer thinks the FCA should have picked up on this sooner and been more proactive.

“Even on the basic ‘follow the money’ principle, it was obvious that it was a very high-risk government policy reform, there were conflicts of interest in the market such as contingent commission and the sums of money were very, very big,” he says. “They should have been alert to that. They shouldn’t have been waiting to do reviews, they should have been doing pre-emptive work rather than coming after the event.”

However Fowler Drew managing director Stuart Fowler has a very different take on what is happening. He says it is possible that firms that specialise in transfers and many of those sampled are simply worse at delivering suitable advice.

FCA’s approach to suitability not fit for purpose

Alternatively, the issue may be more fundamental, he says.

“It could be that problems with the suitability approach are simply exposed when the goal is one that has defined dates and cashflows, when you are move from recommending a set of funds that broadly match someone’s risk tolerance to something that is actually fit for purpose to meet specific amounts and dates.

“The suitability process may be fine and dandy if you are trying to do a risk tolerance matching to a products’ suite, but that may not work with a pension transfer.

“It seems to me the approach that the FCA takes to suitability is really not fit for purpose when assessing the suitability of a transfer. We may need to take the transfer results and turn it back on the FCA and say isn’t there a general problem about how you assess suitability?

“What we are doing that is different is quantification. So, if you have got a probability distribution for outcomes at every year, then it is easy to do DB transfers or indeed to do drawdown.

“The FCA approach to suitability follows what the industry has been doing, asking how do we formalise the process and test for its adequacy? But for anything with a specific goal, then the existing suitability process may not do the job. There is nothing to indicate the FCA realises that.”

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