Pensions freedoms – where we are, FCA concerns and what happens next
23 October 2018
Steve Bailey, director at ATEB Consulting, looks at the impact of the pensions freedoms to date and the potential future action we can expect from the regulator following its 4-phase supervisory project around pensions transfers advice.
The pension freedoms, introduced by the Government in April 2015, gave consumers with defined contribution (DC) pensions more freedom around how they access their pension savings from age 55. There are widely divergent views about whether the freedoms were a good idea or a bad idea.
In the latter camp are those who think that it was little more than a headline grabbing diversionary tactic by the then Chancellor, George Osborne. Towards the other end of the argument are those who recall that there had been a head of steam building up for several years about continuing ultra-low annuity rates meaning that people retiring with a DC pension were stuck for life with a poor pension despite building up a decent pot of money.
Regardless of which view you take, it is undeniable that the freedoms have exposed many clients, and many adviser firms, to risks and potential financial loss.
A by-product of the legislation, was an incentive for people in defined benefit (DB) schemes to transfer their safeguarded benefit to a DC arrangement so that they too could take advantage of the new freedoms. This, in turn, created new and enhanced risks for consumers and advisers and, some would argue, a new pension misselling scandal that was entirely predictable and indeed predicted by many in the industry.
First, the freedoms increased the opportunities for scammers to take advantage of DB members tempted by the possibility of immediate access to what, for many, was a significant tax free cash sum.
The FCA had been working on financial scams as a matter of course but increased their focus on scams targeting consumers’ pensions. As a result of this work, between January 2016 and October 2017, 32 firms stopped providing transfer advice or decided to limit their pension transfer activity. That work continues and more firms have shut up shop since, voluntarily or otherwise as a result.
Concerns about transfer advice
Second, the freedoms significantly increased the number of people who sought advice on the possibility of transferring their DB benefits. As a result, most firms that were already in the transfer advice space, saw a marked increase in the numbers of transfer cases they dealt with and many firms that had not previously been advising on transfers decided to apply for transfer permissions so they could take a share of the newly expanded market.
It should, therefore, come as no surprise that the FCA has been increasingly concerned about transfer advice since the introduction of the pension freedoms.
4-phase supervisory project
In October 2017, the FCA announced that they had embarked on a project to assess the risks around transfer advice. The initial focus of the project was on firms that were undertaking what the FCA considered to be ‘a lot of transfers’, and in particular, firms whose transfer business had increased significantly since April 2015.
1. The first phase involved 22 firms being asked for detailed information on their DB transfer business. Following analysis of this information the FCA reviewed a sample of client files for 13 of the firms and visited 12. As a result of those assessments, four firms ‘chose’ to stop advising on DB transfers.
2. In phase two, a larger number of firms (possibly as many as 92) were looked at and a total of 88 cases where the client had been recommended to transfer were reviewed. The advice to transfer was found to be suitable in only 47% of these. Further, a suitable product was recommended in only 35% of the cases. As a result of these reviews, a number of firms varied their permissions so that they can no longer provide pension transfer advice.
3. Phase three started in December 2017, with the issue of a detailed formal information request to 45 firms, to be followed by visits and sample reviews where it was considered to be appropriate.
4. The final phase, phase four, will involve the FCA writing to all firms that hold transfer permissions in order to gather data around practices on transfer advice across the entire market and ensure that their extrapolated conclusions are as accurate and comprehensive as possible.
British Steel cases
While the planned phases proceeded, the FCA was obliged, by public and political pressure, to look specifically at firms that were involved in advising members of the British Steel Pension Scheme. Only 51% of the advice to transfer was found to be suitable.
What we can expect
The story of transfers and pension freedoms is not a good one and so far there is no happy ending in sight.
As result of the supervisory work outlined above, many firms have ceased providing transfer advice, several have been referred to enforcement or have ceased trading.
If your firm has transfer permissions, it will soon be hearing from the FCA, if it has not done so already. It will probably take many months to gather the data and it’s pretty certain that analysis of the data is unlikely to be completed and made public until well into 2019. However, we would be very surprised if the exercise does not result in some new interim guidance over the next six months and some new or amended rules in due course.
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