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New FCA pension transfer rules lack the ‘clarification’ needed in key areas

8 October 2018

The Financial Conduct Authority has published new rules for pension transfer advice aimed at improving the advice consumers receive, following a rise in demand for final salary scheme transfers. 

According to the FCA paper, titled Improving the quality of pension transfer advice, around 100,000 members are transferring out of defined benefit schemes each year with a value of £20-30 billion.

With consumer interest in pension transfers, and therefore the demand for advice, remaining high, the regulator said its new rules will provide adviser firms with “greater certainty and confidence” around what is expected of them when it comes to pension transfer advice.

Christopher Woolard, FCA’s executive director of strategy and competition (pictured), said: “We expect our interventions to improve the quality of advice which will help to reduce the number of complaints against advisory firms.”

Key to its new rules is a requirement for all pension transfer specialists to obtain a specific Level 4 investment qualification by October 2020. According to the FCA, while a pension transfer specialist may not always be giving the investment advice, they do need to be able to identity whether a proposed scheme and investment is consistent with a client’s needs and objectives for a proposed transfer.

Pension transfer advice must also take into account both the proposed destination scheme and the proposed investments in that particular scheme. While the rules will not prevent two advisers delivering these different aspects, the FCA expects both advisers to work with the same information about the client and have in place robust processes to ensure that happens.

Appropriate triage 

Arguably, one of the most divisive rules, the FCA has set out perimeter guidance on how firms can deliver appropriate triage without crossing the boundary into advice. The regulator has said that any triage needs to be educational and provide generic, balanced information on the advantages and disadvantages of transferring. If an adviser makes reference to a client’s individual circumstances, it is likely to be considered advice.

Commenting on the triage rules, Steven Cameron, pensions director at Aegon, said: “We’re particularly disappointed that the FCA guidance on a triage service continues to focus on what advisers can’t do within a pre-advice conversation. We’d hoped for a more ‘can do’ focus under which advisers would be clear on how they could discuss which personal circumstances make a transfer more or less likely to be suitable without this being advice.”

Cameron said it is important the FCA helps firms understand how much can be included in generic material. Cameron said an effective form of triage would be “hugely beneficial” in helping customers who shouldn’t transfer from incurring significant advice charges.

Steve Webb, director of policy at Royal London, also expressed disappointment with the triage rules.

He commented: “There really does need to be a safe space where advisers can signal that they are very unlikely to recommend a transfer in a particular case without having to go through the entire advice process. This is a missed opportunity to improve outcomes for clients.”

However, Kay Ingram, director of public policy at LEBC Group, came out in support of the FCA rules.

“We think the FCA is right to insist that any initial discussions with consumers must be delivered as unbiased and impartial guidance. It is possible for firms to design guidance services which can deliver really helpful information to consumers without putting them under any pressure to commit to taking full advice. Such guidance can be delivered at an economic cost and give the consumer useful insight into all the things they need to consider before paying for full advice.”

The FA rules also stipulate that advisers will now be required to provide a suitability report for cases where they recommend a transfer does not take place. In its proposals, the FCA said setting out the reasons why it is not in a client’s best interests to transfer is “just as valuable” an outcome as a recommendation to transfer.

Charging structures  

As part of its consultation, the FCA also sought views on whether to intervene in charging structures but stopped short of banning contingent charging. In its explanation, it warned that making any changes to contingent charging could have implications for the supply of advice.

Webb said of the decision: “It is good that the FCA has shied away from a knee-jerk reaction such as abolishing contingent charging.”

However, Ingram said it would have preferred to see a ban introduced: ““Ideally we would have preferred the FCA to also include a contingent charging ban in their new rules. Contingent charging, where a fee is only required if a transfer is recommended, could lead the consumer to doubt the impartiality of the advice given where this results in a recommendation to transfer.”

Cameron added: “We welcome the detailed FCA thinking on the pros and cons of contingent charging for DB transfer advice. The key will be allowing advisers to offer their clients a range of payment approaches to meet their mutual needs.”