Defined Benefit 

FCA fires warning shot at DB transfer advisers

FCA fires warning shot at DB transfer advisers

The Financial Conduct Authority has warned advisers not to cut corners on defined benefit transfers, after it found substandard advice was being given on critical yield.

In a note setting out its expectations on DB transfers, the FCA also clarified its position on insistent clients, overseas transfers, and exactly who is permitted to advise on DB transfers. 

On the critical yield question, the regulator stated that a number of advisers were assessing DB transfers based solely on critical yield.

The critical yield is the rate of return in the proposed new scheme or product needed to replicate the DB pension.

The FCA said a number of firms were basing their recommendations "solely on whether or not the critical yield is below a certain rate set by the firm for assessing transfers generally", rather than comparing it to the specific investments the client intended to take up.

"This does not meet our expectations," the FCA stated. "We would expect the firm to consider the likely expected returns of the assets in which the client’s funds will be invested relative to the critical yield.

"The firm should also consider the personal circumstances of the client before making any personal recommendation, taking into account specific other factors as they apply to the client."

The regulator also stressed that the adviser must consider factors personal to the client, including investment risk, longevity risk, and the risk that "products may not be available or cost effective to meet the client’s needs in retirement".

The FCA also warned advisers not qualified to provide DB transfer advice against using secondary DB transfer specialists, but then claiming they were still providing the advice to the client.

Non-qualified advisers are only permitted to advise on DB transfers if their firm is qualified, and that the advice they give is checked by a DB transfer qualified adviser.

The FCA stressed that secondary firms must also take into account account the client's investments post-transfer.

For advisers with insistent clients (that is, clients who wish to transfer out against their adviser's recommendation), the FCA set out three boxes that must be ticked.

They were that the advice is clear and suitable, that the risks were clearly communicated, and that client is made fully aware that his or her action is against the adviser's recommendation.

On overseas transfers, the regulator stressed that the adviser is still required to consider the investments into which the client wishes to transfer their lump sum.

The FCA's note came as advisers across the board have reported a surge in DB transfers as result of the scrapping of compulsory annuitisation in 2015, and rocketing transfer values following the plunge in gilt yields after the Brexit vote.

james.fernyhough@ft.com

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