FCA finds serious failings in pension advice market

FCA finds serious failings in pension advice market

Advice in more than half of the defined benefit pension (DB) transfers where the recommendation was to move the retirement pot was unsuitable or unclear, the Financial Conduct Authority (FCA) has found.

From a total of 88 DB transfers analysed by the watchdog since October 2015, only 47 per cent were suitable, the FCA announced today (3 October).

The regulator found that 17 per cent were unsuitable and in the remaining 36 per cent suitability was unclear.

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DB transfers have been soaring, as savers seek to take advantage of sky-high transfer values and to move their nest eggs into defined contribution schemes in order to access them via the pension freedom rules.

At the start of the year, the FCA expressed concern about the processes advice firms were using when recommending DB pension transfers.

The regulator published a paper on this matter in June, when it opened a consultation, which closed on 21 September.

A policy statement is expected to be published in the first quarter of 2018.

Elsewhere in its research published today, on the recommended product in the transfer, the FCA found that only 35 per cent of these were suitable.

Some 24 per cent were unsuitable and 40 per cent of these cases the advice result was unclear.

The watchdog said that the proportion of suitable cases is much lower than the numbers found in the wider advisory market for pensions advice.

In its Assessing Suitability Review, published last May, the regulator found that 90 per cent of pensions accumulation advice, and 91 per cent of retirement income advice, was suitable.

According to the FCA, “many firms had designed processes and procedures which result in transfers where the suitability of advice could not be established by the firm”.

This included firms failing to obtain enough information about clients’ needs and personal circumstances, and failing to consider the needs of the client alongside the client’s objectives when making a recommendation.

These companies are also not making an adequate assessment of the risk a client is willing and able to take in relation to their pension benefits.

In some cases, advisers had failed to make appropriate comparisons between the DB scheme and the intended receiving scheme. Therefore, advice was based on incorrect or inaccurate comparisons, the regulator added.

Alistair Cunningham, financial planning director at Surrey-based Wingate Financial Planning, speculated that unsuitable advice in the DB transfer market is related to companies which outsource the advisory services.

He said: “This adds a second tier between the client and the recommendation, meaning it is more likely [that] the advice, particularly investment advice, is not suitable.”

The FCA has been cracking down at how advisory firms have adapted their business models and processes in response to these changes in the DB transfer market.

Over the last 2 years the regulator has requested detailed information from 22 firms on their DB transfer business.

Following analysis of this information, the FCA reviewed a sample of client files for 13 firms, and visited 12 firms.