With the general election fast approaching, it is increasingly unclear what shape a new government may take.
One surprising omission in the campaigns so far has been our industry. Apart from a fair degree (of now outdated) bank bashing, there is little mention of financial services. Yet the UK will be a poorer place unless we galvanise public engagement with our sector. Certainly, whatever the election outcome, people will still need financial advice and life insurance.
While keeping a wary eye on the election, I have also been looking at a discussion paper and a consultation paper from the FCA. Both papers will have a major impact on us.
CP15/7 is all about proposed changes to the FCA pension transfer rules and Cobs.
In a nutshell, this CP proposes to tighten up who can advise on pension transfers and ensure that they are adequately qualified and it is hoped that in the new world of pension freedoms, this move will help prevent mis-selling and protect individual consumers from themselves. Joe & Josephine Public are not pensions experts and they often only hear what they want to hear. A recent survey suggests that 10 per cent of the public genuinely believe that they can now draw all of their pension fund tax free. I believe that it is likely to be more than 10 per cent but the complexities of the new rules mean that most people need detailed advice, especially if they are considering a move from a defined benefit scheme.
Of course the old PIA RU55 was designed to cover ‘at vesting’ transfers but the new flexibility introduced by the government has removed this simple ‘vesting’ test and so the FCA had no option but to effectively rein in the rules and require only pension transfer specialists (PTS) to advise on these cases. To enable this to be achieved, schemes and their trustees will now have a duty to check who is giving the advice. This is covered in 2.41 of the CP and it is worth repeating in part here.
2.41 The government intends that trustees and managers will be required to check that appropriate advice has been taken before undertaking a conversion or transfer in respect of safeguarded benefits. Scheme members seeking a conversion or transfer in respect of safeguarded benefits will need to provide a letter from their adviser as proof they have taken appropriate independent advice. This ‘advice confirmation’ letter would contain four pieces of information:
A.that advice has been provided
B.that the adviser has permission under Part 4A of FSMA (etc)
C. the firm reference number (FRN) of the company or business
D .the member’s or survivor’s name, and the name of the scheme in which the member or survivor has subsisting rights in respect of safeguarded benefits
This is likely to lead to a high demand for AF3 qualified advisers and I expect that many non PTS will now consider taking AF3. For those unsure AF3 is the CII’s advanced (level 6) pension paper that replaced G60.
I genuinely believe that the FCA (& HM Treasury) were right to bring forward these changes. The only alternative would have been to issue further guidance – ‘son of RU55’- and while this would have reduced the need for an exam using the big stick of PTS is easier to police. It also ensures that the advisers do have a high level of pension knowledge that has been independently and vigorously assessed.
The consultation period has now finished (15 April) with feedback in June but in practice the market should have been working on the new basis, as the direction the FCA (and HMT) is taking is clear and I expect June to provide little more than confirmation of the new rules.
In DP15/3 (on the Markets in Financial Instruments Directive) the FCA is asking what is meant by “independence” as the FCA’s current definition is some way off the more basic MiFID II definition which only requires a “sufficient range” of products from a “sufficient diverse group of providers”.
To me the MiFID II definition sounds too much like a multi-tie but equally the current FCA definition is too demanding. The FCA is seeking comments by the 26 May and I encourage you to respond. Next month I will review this and the CII’s new chartered firm criteria.
Dr Peter Williams is an independent business consultant and chartered financial planner
