FCA redress proposals ignore clients' best interests

Carla Langley

Carla Langley

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?

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.

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.