Introduction

On 5 June the FCA announced the latest steps it is taking to tackle the issues it has identified in the Defined Benefit (“DB”) transfer advice market alongside an update on its wider work in this area.

This included the following:

  • PS20/6, a policy statement issuing final rules (largely due to come into force in October 2020 but some elements on 15 June 2020) which included the banning of contingent charging in most circumstances for DB transfer advice;
  • GC20/1, draft guidance to support firms in understanding FCA expectations throughout the advice process for DB transfers;
  • Information for consumers and an advice checker to help consumers check if the advice they have received on DB transfers is likely to be suitable and to aid the ability to make complaints; and
  • Updated details of the FCA’s work in this area including revised suitability figures.

Update on FCA review activity

The FCA has undertaken a large scale review of the DB transfer market. In particular:

  • 85 firms, who were responsible for 43% of DB transfers between April 2015 and September 2018, have had a detailed review using a combination of desk-based review and visits;
  • 1,649 firms have received detailed feedback on areas of practice that they needed to review in their advice model based on data requests;
  • 745 firms have amended their permissions as a result of FCA interventions with 55 as a result of the FCA discovering they did not have adequate professional indemnity insurance (“PII”);
  • The FCA reviewed 377 cases as part of phase 4 of its review: 55% of cases were suitable, 28% had material information gaps and 17% were unsuitable. The results show an improvement on previous reviews but the level of unsuitable advice is still below the FCA’s objective for the market;
  • 192 British Steel Pensions Scheme (“BSPS”) DB transfer cases have also been reviewed: 21% were found to be suitable, 32% had material information gaps and 47% were unsuitable; and
  • There are 30 live enforcement investigations for failures in DB transfer advice.

The FCA has indicated that it will be engaging with the 85 firms and where they have not met all of the standards firms will be expected to take remedial action. This may include conducting past business reviews and paying customer redress.

The FCA is also seeking to engage consumers in considering the quality of the advice they have received and making complaints where they have concerns. The advice checker and information for consumers published by the FCA will be an important part of this process. The FCA will also be writing to c.7,700 former BSPS members who completed a transfer to help them revisit the advice received. As such, it is reasonable to expect that the volume of complaints will increase following these interventions and the likely attention from claims management companies. This may be particularly pronounced for those firms that advised on BSPS transfers or with identified issues in their advice processes.

Contingent charging 

The FCA is banning the use of contingent charging models for DB transfer advice in almost all circumstances from 1 October 2020. The FCA believes this will address the clear conflict of interest caused by contingent charging in the current advice process, where there are only two possible outcomes – to transfer or not to transfer. Key elements of this ban include:

  • The FCA is not permitting the splitting of advice and implementation charges;
  • Advice fees must be the same whether the advice is to transfer or not;
  • The advice should be at least the same as other investment advice;
  • Applies to employer/trustee funded advice (except the price paid by employer/trustee does not have to be at least that paid for other investment advice); and
  • There are carve outs for serious financial difficulty and limited life expectancy where a customer is unable to pay for advice.

The FCA has issued specific guidance on how the carve outs will apply. It is important to note that both carve outs are only available to customers who meet the criteria and do not have the means to pay for the advice on a non-contingent basis. The FCA is also clear, the fact that a customer falls into one of these categories does not automatically mean a transfer will be suitable.

It is likely that a significant proportion of the customers within the carve outs will be vulnerable. Firms should ensure they have appropriate understanding of these vulnerabilities and appropriate processes and training for advisers in place to ensure these vulnerable customers get the right outcomes. These may differ from the vulnerabilities present in a firm’s wider target market in some cases. Whilst the FCA has postponed the publication of its final guidance on vulnerable customers, in its draft Guidance the FCA was very clear it did not regard the expectations set out as new requirements, but rather a statement of its existing expectations under the Principles for Businesses. The focus areas set out in our previous blog on the FCA draft Guidance may be useful for firms in considering this.

Triage and abridged advice 

The FCA has identified that many triage process have breached the advice boundary. Decision trees and risk rated questionnaires, in the view of the FCA, constitute advice in the context of the binary options of a DB pension transfer advice. The Perimeter Guidance Manual is being updated to make this clear.

This means the ability to triage customers early in the process is fairly limited and largely restricted to educational tools. These can be very helpful and effective in educating consumers but are not a true filter of cases by the firm.

To address this challenge, and help keep costs down for those for whom it will obviously not be in the interests of to transfer out of their DB pension, the FCA is introducing an abridged advice service. Key features of this include:

  • Firms do not have to offer abridged advice;
  • A firm cannot complete the Appropriate Pension Transfer Analysis or Transfer Value Comparator as part of abridged advice. The risks of a specific flexible arrangement also cannot be considered;
  • It should cover only the initial stages of the advice process including the fact find of personal circumstances, objectives, needs, the benefits of the existing scheme;
  • It has to be provided or checked by a pension transfer specialist;
  • It cannot result in advice to transfer only advice to stay in a DB pension or to proceed to full advice;
  • Fees paid for abridged advice can be offset against the full advice costs as customers should not be charged twice for the same work;
  • It can be free as long as it is not gamed to avoid the ban on contingent charging;
  • The FCA still expects most advice to result in advice not to transfer even where referred for full advice following abridged advice; and
  • A client cannot become an insistent client without proceeding to full advice.

Suitability 

The FCA is concerned that ongoing advice charges can create a conflict and incentive towards a particular course of action in DB transfer advice. As such, the FCA wants firms to prioritise the workplace pension as the receiving scheme, as the default fund should be appropriate for members without the need for ongoing advice. This is a shift for many firms, especially those who are restricted, who will now need to demonstrate why any alternative receiving scheme is more suitable than the default option in the workplace pension scheme.

The workplace pension scheme will usually be the current scheme but can be other workplace schemes if that is not an available option or if the firm wants to consider all workplace pension options available. The FCA believes many do not benefit from ongoing advice and that the costs have significant impacts on consumers who transfer out of DB pensions in these circumstances. As such, the FCA expects this measure to result in fewer consumers paying for ongoing advice after a DB pension transfer.

The FCA has also stated it does not believe standard paragraphs addressing the workplace pension in the suitability report will meet their current (or revised) requirements. This is common, particularly where a customer is planning to enter decumulation within a short period after transferring. Firms will need to update their advice processes, templates and adviser training to ensure they are meeting regulatory expectations in this area.

Other changes include:

  • Personalised charge communications;
  • Suitability letter summary page; and
  • Increased continuing professional development requirements for pension transfer specialists.

There is further detailed guidance on how firms should approach different elements of suitability and client objectives in the draft guidance. The FCA has also recently published guidance for firms providing advice on DB transfers in light of COVID-19 and firms should also take note of this.

Professional indemnity insurance and capital adequacy 

The FCA has some concerns over the level of PII cover held by firms. Specifically that excesses are too large and exclusions (including for DB transfers) render cover ineffective. The FCA has stated that PII insurers need to ensure they meet their regulatory obligations too. In particular, as product providers, PII insurers should consider their target market and its needs. In this case the FCA has said PII cover for firms that does not meet the requirements in IPRU-INV 13.1 will be unlikely to meet the requirements in PROD.

Linked areas of FCA interest

It is worth noting that the FCA will be conducting a suitability review into retirement advice in due course. Whilst this has been delayed, it remains a key priority in the 2020/21 Business Plan.

Next steps for firms

Firms active in the DB transfer market should consider taking the following steps in response to the FCA’s latest publications:

  • The regulatory changes from October 2020 will drive fundamental changes to business models for providing DB transfer advice and so considering the strategic implications and forward-looking strategy will be critical for firms active in this market;
  • Plan for the changes required including updating the advice process and delivering adviser training;
  • The 85 firms that were part of the FCA review will be receiving their feedback shortly. Many firms will need to take immediate actions to rectify parts of the advice process that have not met FCA standards. For some firms this may include undertaking a broader review of historic advice. It will be important for firms to respond proactively to this feedback and take appropriate action in a timely manner;
  • Firms should prepare for an increase in customer complaints. In managing these complaints it will be important to apply the FCA’s framework for assessing cases (which they have committed to publishing) which may differ from firms’ internal quality assurance frameworks;
  • The FCA has indicated it will use data returns to identify further firms for focused review. In preparation, firms active in this market should ensure they understand the most recent FCA rules and guidance and take proactive action to ensure their DB transfer advice is, and has been, suitable in line with FCA expectations.

If you would like to discuss any of these areas in more detail please contact us.