PensionsAug 15 2022

FCA redress proposals ignore clients' best interests

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FCA redress proposals ignore clients' best interests
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As you sit and read through the 192 pages (hopefully with a strong coffee) of FCA proposals around pension transfer redress that was released recently, one of the things that will hit you is the significant lack of putting the clients' best interests first.

Let’s just remind ourselves that one of the three objectives of the FCA is to "protect consumers from harm caused by bad conduct in financial services". So in that role of protecting consumers they must be considerate of clients' best interests, and what that means when unsuitable advice is given. 

So, consider this. A client receives an unsuitable pension transfer. This assessment of unsuitability is by default stating that the client would have been better off remaining in their scheme and taking scheme benefits.

And most importantly, that the defined contribution arrangement was unsuitable for them. That is the crux of an unsuitable assessment of a defined benefit to DC case. That a DC solution is unsuitable for them. And that is the single point of why the current redress guidance, and the proposed redress guidance, does nothing but create client detriment.

If a DB to DC case is assessed as unsuitable, and that by default means a DC arrangement is unsuitable for a client, then why would it be the right thing to add to that unsuitable DC solution by way of compensation?

The FCA are simply running roughshod ahead with their proposals.

And this is a question that is not addressed in the FCA’s consultation paper.

The FCA are simply running roughshod ahead with their proposals, irrespective of the significant and consistent message given to them by the industry on the back of the British Steel redress consultation.

If an assessment has been made to say that a DC arrangement is categorically unsuitable, then there is no logical argument as to why appropriate redress would be to augment an unsuitable solution. Or worse still, augment their bank account.

Neither of these scenarios provides the client with secure, guaranteed benefits for life. What it simply does is give the client an even greater financial burden to look after, with no guarantee that it will perform as expected or provide the benefits the scheme would have provided in the long term. 

As has been the argument from across the industry, the most appropriate redress method is to place those already retired into an annuity solution whereby the benefits are secured for life, using a combination of existing DC funds and any additions needed from the firm.

For those not yet retired, a solution could be put together, probably with a large insurer, where the insurer can offer a deferred annuity matching scheme benefits using a predefined calculation. The existing DC funds plus an advisory firm top-up can then be used to secure these benefits.

The significant client detriment created smacks you straight in the face.

Alternatively, a ring-fenced solution could be created whereby funds are held securely for the benefit of the client, and these funds are used to secure income at the normal retirement date. A calculation would be done at point of complaint to calculate an estimated redress amount. This could then be paid into a ring-fenced solution, with a balancing calculation done at NRD once secure benefits are purchased.

If a firm goes out of business before the client's NRD then at least the estimated redress has been ring-fenced, and any balancing payment could be topped up by the likes of the Financial Services Compensation Scheme.

Although this will require some hefty changes to legislation, this kind of solution is not impossible. And that is important to understand. These solutions are not impossible.

When you look at the existing redress guidance and the proposed redress guidance, the significant client detriment created smacks you straight in the face. And this can not be ignored.

If we are to put unsuitable DB advice right, we have to make sure that each and every client who has received unsuitable advice is offered the opportunity to secure their benefits again. For those who decide they do not want a secure income, then they can refuse the redress and continue with their existing DC scheme.

If, however, we throw more cash into their DC pot, or worse still, their bank account, we are then leaving the client exposed to future unknown investment risk, future unknown inflation risk, as well as the risk of overspending. In addition, many of these clients are likely to be deemed to have low levels of knowledge or experience, and often vulnerability factors, that mean it is highly unlikely that a risk-based solution is suitable.

The FCA would not accept from a firm that something was ‘too difficult', so we should not accept that from the FCA.

It simply cannot be argued that any form of redress as a cash sum to a DC pot or bank account is suitable for a client who has been deemed to have received unsuitable pension transfer advice. And by making payments to clients in this way is not only inappropriate, it creates client detriment as you are simply augmenting an unsuitable solution.

There is no other place in the FCA handbook that encourages an unsuitable solution to be augmented. And there is absolutely no place for that stance when it comes to pension transfer redress.

As an industry we must highlight when things need to be changed, and we must fight for that change. The FCA would not accept from a firm that something was ‘too difficult so we didn’t put the client’s best interests first’. So we as an industry should not accept that kind of stance from the FCA. And making that clear in the consultation response is vital.

It might be difficult for the FCA to make the appropriate changes, but when it comes to protecting consumers, nothing should be too much.

Carla Langley is founder of the Langley Consultancy