Today (8 June) the Financial Conduct Authority published its policy statement on pension transfer advice, finalising rules on when clients must seek advice before seeking to move their fund to utilise new retirement freedoms and oversight is needed from a qualified specialist.
While little has changed from the original paper in March, there are some nuggets which advisers should absorb and a couple of new exemptions from the specialism requirement. A factsheet was also published giving further guidance on the related area of insistent clients.
Here are seven key takeaways from the paper.
1. Crystallisation exemption removed.
The rules cover transfers, or ‘conversions’, between schemes where ‘safeguarded’ benefits are being surrendered - and in most cases require oversight by a fully qualified ‘pension transfer specialist’.
This covers transfers from money purchase schemes where guaranteed benefits are being surrendered as well as final salary transfers, even where the transfer is being sought to immediately access the fund.
This effectively removes the exemption from the need to obtain transfer permissions, under guidance issued in 2011, to process cases where the transfer is explicitly to cystallise benefits.
The main exemption remains where the fund value, including guaranteed benefits, is less than £30,000. A proposed exemption from the need to have transfer specialist oversight in cases where the safeguarded benefit is a guaranteed annuity rate was also retained.
A new exemption was also introduced for cases where a transfer from a defined benefit scheme is to crystallise benefits and the member is at their normal retirement age.
2. Transfer value rules review.
Later this year, as part of a broader review into the FCA’s handbook pension rules, the regulator will consider whether there is a need for a full review of its transfer value analysis requirements, which were established when the only option within a contract-based scheme was an annuity.
Initial response was positive but sit tight, this isn’t a review yet. It’s a commitment to “consider whether there is a need for a full review.”
3. Independent means independent.
Any adviser can deal with these transfers, so long as they have the right permissions and, where required, qualification. There were concerns that the legislative wording of ‘independent’ advice would refer to more stringent - and now under review - RDR standards.
The DWP confirmed that, while advice has to be provided by an adviser who is independent of the employer or trustees/manager of a scheme, it can be provided by an adviser who operates on either an independent or restricted advice basis.
4. Insistent client advice is OK.
The Financial Conduct Authority confirmed in a separate factsheet that advisers are able to advise on transactions or decisions that go against recommendations.
The regulator said there is no rule to prevent advisers from transacting business against their advice if the client insists on doing so, but reiterated previous guidance to document the full process, including the fact that it defies the recommendation.
The file should show that you have made it clear to the clients the risks associated with the alternative course of action and that the client is acting against your advice.
5. We still don’t know what a ‘safeguarded benefit’ is.
The FCA will be doing a lot more work with the department for work and pensions as a number of respondents were disappointed that the legislation defines ‘safeguarded’ benefits in the “negative” and asked that the regulators produce further guidance as to what falls within the definition.
The DWP said it will work with the FCA and engage with the pensions industry over the coming months with a view to publish broad categories and themes to help providers identify ‘safeguarded’ benefits and apply the advice requirement.
6. Ex-pats may pay twice for advice.
Questions were also raised as to whether overseas residents will need to get advice. Effectively, the FCA said, they may have to get advice twice: once in the UK under these rules, and then in the receiving scheme’s jurisdiction on local tax rules and the like.
The regulator said that non-UK residents will need to get advice, however it has raised the potential difficulties and costs it imposes with the DWP. The DWP will be working with the regulator to see whether amendments are needed to ensure that the rules “operate as intended”.
7) Underestimating costs - and advice demand.
The regulator also published, as per normal, a cost-benefit analysis, which revealed that it had previously underestimated one-off costs by a factor of anywhere up to five times.
Previously, the regulator estimated that the ‘total one-off’ cost for the cost of advice on pension transfers to allow people to access their pension would be around £340,000, but now it appears it could be a maximum of £1.6m.
It also admitted that the number of new transfer specialists the rules imply there is a need for is around three times more than it had previously stated, upping the estimate from 45 to 130.
donia.o’loughlin@ft.com
