The defined benefit (DB) pension advice space in the UK has been contracting at a fast pace over the last few years.
A Freedom of Information (FOI) request International Adviser sent to the Financial Conduct Authority (FCA) confirmed this trend.
Between January 2020 and December 2021, 1,019 financial advice and intermediary businesses gave up their DB permissions.
The number grows to 1,093 if non-advisory/intermediary firms with DB permissions are included, the FOI revealed.
Since the British Steel scandal, many firms started opting out from offering advice on DB transfers due to the high risk they carry – both for the company and the client.
Many businesses were forced to shut down due to legacy DB advice issues, while many others struggled to secure professional indemnity (PI) insurance as premiums for those advising on such transfers skyrocketed over a couple of years.
In addition, increasing regulation on the space, including a ban on contingent charging, has made operating in the DB advice area even more difficult.
‘Highly complex area’
Jason Hollands, managing director, corporate affairs at Tilney Investment Management Services, said: “It’s really interesting to see the scale of firms who have given up DB pension advice permission in black and white. But it is also not surprising to see many firms cease to provide such advice.
“This is a highly complex area of financial planning and has – rightly – come under heavy regulatory scrutiny on the back of high-profile cases of inappropriate advice, most notably in the case of thousands of British Steel workers who were poorly advised to transfer our of final salary pensions.
“The bar to advise someone that makes sense to transfer out of the security of a final salary pension scheme is exceptionally high, and DB pensions advice should only be undertaken by an adviser with the appropriate qualifications and experience and with recommendations based on very rigorous analysis of the clients’ circumstances.
“The financial impact on someone of getting this type of advice wrong can be dramatic for the client and therefore it is also a business risk for firms who providing advice in this area.
“With the UK advice market comprised predominantly of small firms – around 90% of which have five or less advisers – and many sole traders, it is unsurprising that a considerable number of firms will no longer provide advice is this complex area.
“A key consideration for firms who have withdrawn from offering such advice is almost certainly the impact on their ability to gain professional indemnity insurance cover, as offering DB transfer advice will have a significant effect on their premiums.”
Does it make ‘financial sense’?
According to Tim Sargisson, chief executive of Sandringham Financial Partners, there are six factors worth highlighting when looking at the contracting DB advice market:
- “The FCA’s ban on contingent charging by financial advisers. This means members now have to pay for transfer advice whether a transfer is recommended or not.
- The FCA has reminded firms to regularly review regulatory permissions to ensure they are up to date and removed where they are not needed. The FCA expect firms to notify them of material changes and apply to make any necessary changes in a timely way. The FCA also have the power to cancel a firm’s Part 4A permission if it has not carried on a regulated activity for at least 12 months. Therefore, firms will have voluntarily given up the DB permissions if not using them.
- This lack of DB activity by firms in recent times may have been prompted by soring PI insurance cost in this area. Leaving many firms to question whether it made financial sense to continue operating in this space and concluding it probably wasn’t and removing their DB permissions
- The FCA has been increasingly active and DB transfers leading to poor client outcomes will inevitably lead to a firm losing its permissions.
- Fewer people are requesting transfer value quotations. In the fourth quarter of 2020, 116 members out of every 10,000 requested a quotation, barely half the rate in the summer of 2017.
- A smaller percentage of people who obtain quotes move on to transfer. Only 15% of those who received a quote in Q4 2020 have now transferred. This ‘take-up rate’ of around one in seven quotes turning into a transfer compares with a high of one in three in the middle of 2017.”
Stable advice presence
On a positive note, the FOI revealed that the number of regulated financial advisory and intermediary businesses has approximately remained the same over the period, with 5,415 firms in January 2020; 5,395 in January 2021; and 5,418 as of 21 December 2021.
The FCA said that the figures include companies with permissions to advise on P2P agreements, on pension transfers/opt outs, and to provide financial advice.
The regulator highlighted, however, that it does not have a specific categorisation for independent financial advice firms.