How to avoid the FCA's pension transfer wrath

How to avoid the FCA's pension transfer wrath

Former Financial Conduct Authority (FCA) technical specialist Rory Percival has outlined how advisers can avoid the regulatory pitfalls when advising on defined benefit pension transfers. 

To evidence the basis for their recommendations, Mr Percival has said financial advisers should produce reports for each time they advise a client to stick with a defined benefit (DB) pension, as well as when they encourage them to transfer out.

Speaking at a seminar for advisers organised by Prudential in London, Mr Percival said "giving advice to stay is probably as risky as giving advice to transfer".

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He said: "Personally, I think you should do that [the recommendation to stay in the scheme] more formally, and write the client a letter or an email explaining that [decision].

“It's not a 30-page suitability report. It is probably two or three pages, setting out what it is that the client was trying to achieve, why you think that it is better to keep their pension where it is and the disadvantages of that option.

“If you do that, I think that is a better way for the client but it is also a good practice for your firm, because you are protecting it against future complaints.”

The volume of DB transfers has 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.

Alan Chan, director and chartered financial planner at London-based IFS Wealth & Pensions and one of the advisers at the seminar, said that his firm already produces this type of report for insistent clients.

He said: “[The suggested report] can simply make references to the first report and will serve to reiterate the actions chosen by the clients and the risks involved in that action and that it is going against your advice.

“So, it will not take the adviser too much time to do.”

Mr Percival, who launched his own consultancy firm in 2016, also advocated that advisers should keep a record of the number of clients it discussed pension transfers with, both remaining and to pull cash out recommendations, as a way to better respond to the regulator's queries on this subject.

The Financial Conduct Authority is currently reviewing the rules for pension transfer advice, after publishing a 65-page consultation paper in June.

In this proposed guidance, the regulator stated that in the majority of cases it is best for the individual to stay in the scheme.

Mr Percival said: “It is an easy question for an FCA supervisor coming to visit you to ask what are your numbers, and how many [clients] have you recommended to stay and how many have you recommended to transfer.

“And if you can show your record and say this, they can be happy with that.

“If you say we have these ones that we recommended to transfer, but there is lots of others that we have recommended not to, I would ask how many? If you don’t keep a record it is not quite as easy to defend your position then.”