In addition to its ban on contingent charging for defined benefit pension transfers, the Financial Conduct Authority published an update to its ongoing targeted supervisory work on Friday morning.
In it, the financial watchdog is looking at firms that have given advice to those seeking to transfer out of a DB scheme.
During an industry-wide data collection from over 3,000 firms; the FCA provided “detailed feedback” to more than 1,600 businesses, resulting in over 700 giving up their permission to provide pension transfer advice.
In addition, the regulator conducted in-depth reviews of the 85 most active firms in the market, which were responsible for 43% of transfers between April 2015 and September 2018.
The aim was “to identify those firms most likely to be providing unsuitable advice”.
Very biased view
N2 Asset Management director Eugen Neagu said: “In the last month or so, I have become aware of several advisory firms claiming that transfer values are better than ever, to entice people to request cash equivalent transfer values (CETVs) and be hired for pension transfer work.
“This shows a very biased view on how pension transfer analysis should be performed, and in many cases, they forgot that the CETV means cash equivalent transfer value, and there is not ‘free money’.
“Although transfer values are higher given lower discount rates due to low gilt yields, the expected investment return in the future would also be lower. This does not mean that only the bond returns would be lower, but also equity expected returns due to capital asset pricing model (CAPM) formula.
“The FCA would need to continue its regulatory work in this area, and I know that many honest financial planners would continue to help them.
“We would need to be able to stop those financial advisers, who have their own biases, sometimes due to conflict of interests. Banning contingent charging would not be enough for this,” Neagu added.
The FCA found that there has been an improvement in the suitability of advice given over time, rising to 60% of cases being deemed suitable in 2018 from a low point of 47% in previous years.
But, the regulator said it “remains concerned at the [17%] of files which either appeared to be unsuitable or where there were information gaps”, which is said was “unacceptably high”.
Interim FCA chief executive Christopher Woolard added: “The proportion of customers who have been advised to transfer out of their DB pension is unacceptably high.
“While much of the advice we looked at was suitable, we are still finding too many cases in which transfers were not in the customer’s best interests.”
Where firms have not met the required standards, the FCA expects them to look at their past business and pay redress; and, where appropriate, the regulator will continue to “ensure the removal of firms from the market”.
The FCA is carrying out 30 enforcement investigations, arising from concerns identified in the course of its DB transfer market review.
The regulator has produced an ‘advice checker’, which will provide customers with information about the advice they should have received.
It has also produced consumer information, which will be useful for customers who are considering transferring but have not yet made the decision to do so.
The UK watchdog will work with other organisations over the coming months to “ensure consumers have easy access to this information”.
Keith Richards, chief executive of the Personal Finance Society, said: “We welcome the introduction of the FCA ‘advice checker’ which addresses investors who have already made a decision to transfer.”
“As part of Pension Transfer Gold Standard, the Pension Advice Taskforce produced a similar ‘checker’ for pension scheme members before the point of sale, which has been adopted as good practice by Pensions Administration Standards Association for members who are considering transferring out of a scheme.”
PI insurance problems
International Adviser has repeatedly reported on the difficulties advisers face when it comes to professional indeminty (PI) insurance, with one firm seeing a 400% increase.
In April, amid the coronavirus pandemic, the FCA outlined its expectations for firms to ensure they have adequate cover in place.
Of the 745 firms who gave up their permissions, 55 did so after the regulator found they did not have adequate PI insurance.
Aegon pensions director Steve Cameron added: “On top of these new FCA requirements, the supply of advice on DB transfers is already under huge threat because of the increasing difficulty advisers face in obtaining professional indemnity insurance.
“We hope the FCA will keep this under review and seek solutions to make sure the market can still operate.”
British Steel Pension Scheme
The DB transfer market was changed forever after the British Steel Pension Scheme (BSPS) scandal.
In December 2017, BSPS members were given three options about the future of their DB pensions:
- shift to another plan;
- stay in the fund, which was moved to the Pension Protection Fund as British Steel was closing its existing scheme; or,
- transfer out.
Some of those opting to transfer out became entangled in a scandal which saw financial advisers encourage steelworkers to transfer their retirement pots to other investments; including esoteric, high-risk overseas funds.
The FCA has reviewed files given to BSPS members, which included the advice they were given, and found that the percentage of unsuitable files was higher than those in the rest of the sample.
Of the 192 files reviewed – 21% appeared to be suitable, 47% appeared to be unsuitable and 32% appeared to contain information gaps.
Given these latest findings, the FCA intends to write directly to all roughly 7,700 former members of BSPS who transferred out.
“This will help them revisit the advice they received, and to complain if they have concerns,” the regulator said. “The FCA will maintain its focus on firms providing transfer advice and work looking at this sector will continue.”