The advice sector has had about fortnight to work through the Financial Conduct Authority’s (FCA) new pension transfer tool and to form a view about what it means for the market.
The tool covers the regulations as they stood up to 1 October 2020, rather than the rules as they apply now, although an adapted version is in the works.
The FCA was explicit at launch that the tool – the Defined Benefit Advice Assessment Tool (DBAAT) – would help firms check their previous advice.
“We published the DBAAT to help firms and pension transfer specialists understand the FCA’s file review methodology for DB transfer advice,” the watchdog explained.
The introduction of the tool did not lend itself to instant opinions, as advisers and consultants wanted to work their way through it before commenting.
Now they have.
Process versus outcome
Consultant and former regulator Rory Percival believes it will allow firms to consider whether they have been overly process-driven rather than outcomes-focused.
He says: “I think it is good, but I’m biased. It is an extensive development of the one I created for Supervision when I was there, probably around 2013. The fundamental concept is the same – breaking down the big suitability, and disclosure, question into a series of potential unsuitable outcomes and testing for these.
“Many firms’ approaches seem to be overly process-focused rather than outcomes-focused. It’s good that the FCA have published this.”
On how useful it will prove to be, Percival says it should be very useful although he notes there could be some practical integration issues. “It’s certainly useful for firms to be able to use the same tool as the FCA so they can be as aligned as possible.”
He also thinks the instructions are clunky, but says this is by necessity and was clearly primarily written by a lawyer with close reference to the rules.
“There may be an issue for medium and larger firms integrating this tool into their existing file review approach, particularly in relation to outputs feeding into feedback and management information tools,” he added.
But he does think there are some key useful bits in there, particularly around the examples of unsuitability. And he sees some key reads across to other business areas, particular retirement income advice.
“Firms should consider the implications for other areas of advice and how they assess these in their file reviews. It can also be used as a basis for update training for advisers.”
‘A note-taking exercise’
CanScot Solutions principal Robert Reid said he can see some people quietly using the pre-1 October version of the tool to see if they have a problem or not. “It is fairly simple,” he says.
He added that when you get off the first sheet of the workbook, the other sheets are rather subjective.
“It is almost like a note-taking exercise,” he said. “I looked at it to see how does it drive the final position, but it doesn’t really. And if you collate all this text, I think you take yourself to a subjective position. Then your challenge is taking this subjectivity and being consistent across different cases within a firm.”
More generally, he said the first set of questions regarding suitability is probably the most crucial.
Examples include:
– The client is or will be reliant on income from this scheme.
– The aim of the transfer is to maximise death benefits but there is insufficient evidence on the client file to demonstrate this is in the client’s best interests.
Reid added: “I think they are saying if you can’t get this to line up on page one, you have a problem. The first question, about whether the client is reliant on the income, if I put ‘yes’, then it’s unsuitable.”
He said that seems to apply to most of this question set.
But the last in the set is different.
– The adviser recommends that the client retains the benefits within the scheme when a transfer appears to be suitable and in the client’s best interests.
“If you want to do everything as ‘do not transfer’ then that one will catch you,” he added.
He said that could catch adviser firms and some compliance departments that are set on keeping themselves ‘out of jail’ by almost always deeming a transfer unsuitable.
Comparison calculation issues
Independent compliance consultant Adam Samuel has had issues with the tool as well.
“It doesn’t hit the big issue of the day and that is how to get a comparison calculation done correctly and how to factor in concerns about the employer’s scheme.
“We know that, if we think the employer could go bust, you need to run a comparison against the pension potentially provided by the Pension Protection Fund.
“What is difficult, however, is how much weight to give that. But the biggest issue is getting the calculation right and then, if you do, it is how you read that.
“If you are looking at the tool as a means of communicating official information, it doesn’t achieve it. The page on insistent customers fails to make the point that it is almost impossible to do a compliant insistent customer case.”
Is a causation page necessary?
Both Reid and Samuel also query the inclusion of a causation page.
“Causation is not a matter of regulatory compliance but a matter of compensation, and that is it.
“I would take it out altogether, though actually I would say in no uncertain terms stop doing insistent customers,” Samuel adds.
But Reid said advisers do need to pay heed to the tool.
“What it does do is show the direction of travel,” he adds. “It tells you what the FCA is thinking.”
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