The FCA’s proposals have been made in recognition of recent economic and legislative changes, in particular the introduction of the pension freedoms, that have resulted in a big increase in individuals seeking pension transfer advice.
Codifying the rules
The rule changes amount, in many respects, to a codification of the FCA’s known existing views on pension transfers.
For example, the proposal for a new Appropriate Pension Transfer Analysis (APTA) includes the requirement that consideration is given to the specific proposed receiving scheme and underlying investments; advice on a transfer in isolation from the underlying investments will not be acceptable.
This merely crystalises what the FCA has being saying for some time.
Some of the proposals arguably provide a degree of clarity over expectations for the content of advice – which could in fact reduce risk to advisers.
However, there are still many areas of ambiguity.
Two adviser firms
Risks will remain where two adviser firms are involved in the advice process, one advising on the transfer and the other on the fund’s destination.
This may arise either where a firm does not have pension transfer permissions and outsources the transfer advice to another firm or where a firm is advising on an overseas transfer, when an overseas firm will be needed to advise on the destination funds.
In either scenario, firms should liaise to ensure the overall recommendation remains suitable and to avoid any disconnect.
Yet no guidance is provided in the proposals on how responsibility and, crucially, liability should or can be apportioned. As such, there is a danger that firms will be held liable for the entirety of the transaction regardless of another firm’s involvement.
What is ‘appropriate’?
The new Transfer Value Comparator takes the estimated cost of buying an annuity at NRA to match the projected benefits of the DB scheme and then, using an assumed growth rate, discounts that cost to illustrate the amount needed today to be able to meet that cost.
The discount rate must be appropriate for each client based on their personal circumstances.
This assessment of an appropriate discount rate will be a crucial judgement call that may in retrospect be criticised by the FCA or FOS.
The proposed guidance on assessing suitability includes the need to consider a client’s “relevant wider circumstances”, which is deliberately vague and risks advisers failing to consider circumstances which the FCA or FOS later determine to be relevant.
Similarly, the APTA has to be tailored appropriately to each client and the FCA states it is not being prescriptive on the areas that should be included as part of the analysis, which involves similar ambiguity and risk.
The consultation paper does mention that the tax consequences of crystalising benefits and accessing funds is one area that ought to be taken into account as part of the APTA.
Since the introduction of the pension freedoms, this is and will remain a significant risk area due to its complexity.
Needs vs objectives
The consultation states that a recommendation will be unlikely to be suitable if it meets clients’ objectives but not their needs. There will be clear scope for argument about how clients’ “needs” should be assessed as against their objectives.
Nevertheless, this difficulty arguably exists currently.
For example, advisers are already criticised if they advise on a transfer in order to try to help a client achieve an income objective that, given the client’s financial circumstances and attitude to risk, is arguably unrealistic.
Risk remains the same
Overall, the risk of providing advice on pension transfers will probably remain the same if these proposals are implemented; the added clarity in some areas being off-set by the continued lack of clarity in other important respects.
If one of the FCA’s objectives was to address the industry’s concerns relating to future liabilities and redress in respect of pension transfers, their proposals seem unlikely to have any significant impact.