Transferring from a DB scheme is a life critical decision and requires high quality, skilled and impartial advice. Colin Dyer, National Advice Manager at 1825, looks at some of the key issues arising from the paper
The Financial Conduct Authority’s consultation paper – CP19/25 – is probably the most talked about CP of the year. It has led to strong debate in the advice community and many viewpoints being aired ahead of the formal deadline. At the highest level our concern is people’s future ability to access high quality advice on Defined Benefit (DB) transfers.
I can’t think of a moment when a client could have a greater need for professional, unbiased and holistic advice. Transferring from a DB scheme is a 30, if not 40-year decision. If you make the wrong choice changing jobs, you can usually fix it quite quickly. If you buy a house that isn’t right, you can make another move within a few years. If you make the wrong decision when transferring benefits from a DB scheme you may have to live with the consequences for decades, it’s a critical decision.
So, yes there is significant risk but we very much see the potential upside as well. For clients in the right circumstances, a DB transfer can be little short of life-changing. Bringing far greater income flexibility and greatly increasing the inheritance people are able to pass on.
There is a significant need for high quality, skilled and impartial advice for clients in this area. Rising pressures on advisers and paraplanners and evidence of poor advice have already reduced access to advice on DB transfers. And, the themes in the paper could see more firms, advisers and paraplanners turn their backs on this important area.
The final policy must strike a balance between addressing concerns, but creating a framework and environment within which quality advice and planning can be sustained to help clients get the right outcome.
That’s the high level, helicopter view. Here are a few areas we will be engaging on:
• Early review activity was centred on firms that were of particular concern so it will be interesting to see the findings from a broader sample of cases that is hopefully more representative of underlying quality and client outcomes.
• We absolutely agree that advice fees should generally be non-contingent. It’s very concerning to see practice of an unrealistically small advice charge at the front end and then firms or advisers aim to make money from transferred assets. That is a recipe for poor client outcomes. We must have an environment where sensible fees are charged, utterly regardless of whether the client transfers or not. We do, however, recognise that there are some additional costs we have for clients who do transfer. And as long as the non-contingent part of the fee is a clear majority, we believe there should be potential for a smaller implementation fee, to avoid non transferring clients subsidising the costs of transferring clients. That is a fair and balanced approach.
• All firms have a clear responsibility to address conflicts of interest and ensure that their advisers and paraplanners are supported and rewarded for excellent service and excellent client outcomes, rather than obvious biases towards one outcome or another.
• We are strongly supportive of ‘Scheme pays’ considerations. This would increase the ability of clients to confidently access advice. This must be a positive for such an important life decision. To be effective the limit would need to be sensible, in relation to the costs of quality advice, and on an agreed basis regarding how it would impact the benefits. We also continue to strongly support industry wide adoption of a requirement for schemes to offer partial transfers – this offers a far broader range of options for clients and is a substantial improvement over what could be a binary choice at present.
• There is a need for the industry to engage the FCA regarding the costs of giving holistic, quality advice, particularly around DB transfers. There is a significant variance between our experience of the costs involved and the price caps with other examples given in the consultation paper. We are clear on the value clients receive from our advice, but costs of providing that advice have risen considerably over recent years based on regulation, and our desire to provide deeper analysis and consideration of the client’s circumstances.
• More broadly we are supportive of the recent ‘Gold Standard’ approach taken by the Personal Finance Society (PFS). This scheme could be extended and potentially endorsed by the FCA to cover key themes from the final policy and act as a clear benchmark for the industry, and give assurance to clients about the standards in place.
This paper is key engagement for the industry and will have long term, significant implications for provision of advice at a critical moment in people’s lives. We look forward to engaging with the FCA further and we hope for a policy that will ensure broad access to quality advice for many.
