The Financial Conduct Authority (FCA) today published a policy statement and consultation paper on new rules on pension transfer advice. Here we pick through all combined 128-pages to give you the must-know changes.
1) Make it personal and make assumptions
Pension transfer advice must include a personal recommendation to the individual to either transfer or remain in the current scheme.
Despite protests from the industry, the regulator said it would not change the £30,000 advice threshold requirement because it is set out in legislation.
Last year the watchdog proposed ditching guidance an adviser should start from the assumption a transfer will be unsuitable, and move to a neutral starting point.
However, since the British Steel debacle the FCA has now decided not to proceed with this proposal.
Advisers must consider alternatives to a pension transfer to meet a client's objectives, which may include giving up only some safeguarded benefits so that a client can meet their income needs in retirement.
Advisers must also find out if a scheme offers partial transfers.
2) Transfers specialist can't just tick boxes
A pension transfer specialist must give or check advice on pension transfers.
Now the FCA has stated they must also assess the reasonableness of the personal recommendation reached by the adviser.
The specialist must also assess the compliance and reasonableness of the advice, and inform the adviser in writing of any disagreement with the process.
Any disagreements between the transfer specialist and the adviser must be settled before the client is given the suitability report.
Qualification requirements for pension transfer specialists were called into question and the FCA will consult on raising standards.
3) What appropriate transfer analysis looks like
An "appropriate pension transfer analysis (Apta)" should demonstrate the suitability of the personal recommendation, as well as both behavioural and non-financial analysis, and consider alternative ways of achieving client objectives.
Firms must decide whether to use a critical yield approach, but should be aware of the risks of using critical yield over uncertain future lifetimes where income would not be secure, or where consumers may not understand it.
The FCA warned of the limitations of cashflow modelling tools, which cannot limit advisers' responsibility for providing suitable advice.
For overseas transfers and self-invested clients, the FCA considers the Apta can be adapted to cover the personal circumstances of clients, and advisers must disclose any commissions payable on overseas investment.
As the relative value of the death benefits will change over time, the FCA retained the requirement to assess those changes at future points in time.
Advisers must consider the impact of tax and access to state benefits, particularly where there would be a financial hit from crossing a tax threshold/band.
Also the Apta must consider a reasonable period beyond average life expectancy, particularly where a longer period would better demonstrate the risk of the funds running out.
Advisers must consider trade-offs more broadly, as well as safety nets such as the Pension Protection Fund and Financial Services Compensation Scheme (FSCS) in the UK in a “balanced and objective way.”