The previous paper asked questions on topics such as qualification requirements for advisers and the responsibilities for advisers working together. But in addition to the areas originally discussed, a number of new issues were raised during the initial consultation process.
As a result, the regulator is now seeking views on topics such as the role and qualifications of pension transfer specialists, how to define a pension transfer, how to deal with triage services if offered, assessments of attitudes to risk, and a mooted requirement to provide suitability reports in the event of a negative recommendation.
In addition, it is also seeking views (but not proposing rule changes at this time) on charging structures associated with advising on pension transfers. So it is worth looking at some of the issues arising from the consultation in more detail.
Specialist qualifications
The FCA is proposing that a pension transfer specialist (PTS) must hold the relevant qualifications for advising on investments before they can advise on or check pension transfer advice. It proposes that existing PTS must acquire the additional qualification by October 2020. There will be no ‘grandfathering’ process involved – the deadline will apply to all.
This is not likely to be a significant issue for most PTS, most of whom are typically highly qualified. Those who do not have the additional qualification have plenty of time to get up to speed. What it does do is continue the theme of full personal recommendations, because PTS will need to ensure they understand the investments fully, even if they were not the ones who originally chose them.
This feeds into the proposed guidance on advisers working together – something that often occurs due to the expertise needed to give pension transfer advice. The FCA makes it clear that it is not possible for one firm to make the transfer recommendation and one firm to give the investment advice, with no interaction between them. It expects both firms to work together to ensure that the advice takes into account factors such as investment advice, the attitude to risk (transfer and investment), and the potential impact of the loss of the safeguarded benefits. This will go against some pension transfer business models, but without this change it would be difficult to fulfil the requirement for a full personal recommendation.
In addition to the investment qualification requirement, the FCA proposes to amend the exam standards to take account of recent developments in the pension landscape. These encompass not just pension freedoms in general but also the mandatory advice requirement, the rules and guidance contained in its latest policy statement, and the changes proposed in the latest consultation. The exam standard will, therefore, cover personal recommendations and advice boundary issues, appropriate pension transfer analysis (APTA) and transfer value comparator (TVC) work, overseas advice, and taxation.
Pension transfers and self investment
One big concern for those giving advice involves clients who are capable of self investment and want to make the investment decisions themselves. The FCA looked specifically at these clients, and makes clear in the latest consultation paper that advisers should take into account the proposed destination of the pension, even if they are not the ones making the investment recommendation. Where the destination is put forward by the clients themselves, the situation is no different, other than the fact advisers will have to make clear that the client needs to provide the necessary information about the scheme and its underlying investments.
It may well be the case that the transfer would prove unsuitable because of the proposed destination and/or investment. Where a transfer is unsuitable in principle, but not specifically in relation to the proposed destination, the adviser should explain the basis for the recommendation.
Where the transfer is unsuitable, specifically as a result of the proposed destination, the adviser should explain that a transfer may be suitable if a different destination for the funds was selected. This could cause issues with a client, but it is the only way to assess the pension transfer in a full and clear way. If this were not the case, the adviser could avoid full responsibility for the pension transfer – an outcome the FCA is trying to avoid.
Pre-advice issues
Many advisers operate a triage service as part of their defined benefit (DB) transfer advice process. This can be a good way to decide if a full review of the benefits is required before incurring cost and effort on the part of both the client and the adviser.
The purpose of triage is to give customers sufficient information about safeguarded and flexible benefits to enable them to make a decision about whether to take advice on the transfer or conversion of their pension benefits.
The FCA considers that triage can be useful to educate consumers on some of the basic features of different types of pensions and the transfer process, including the costs involved. It also agrees that, when used appropriately, triage can prevent consumers paying advice charges unnecessarily. It may also address some of the advice supply issues in this market, as it enables advisers to focus on clients with a realistic prospect of transferring.
In the FCA’s view, if triage is to be a non-advised service, it should be an educational process so consumers can decide whether to proceed to regulated advice. Firms can achieve this by providing generic, balanced information on the advantages and disadvantages of pension transfers. The FCA is clear that if an opinion on a transfer is given in the triage meeting, the adviser is likely to be straying into regulated advice. The firm should keep records of all triage that has been provided. To help ascertain what is suitable, the FCA has given examples of what it would consider to be triage.
Suitability reports for negative recommendations
The proposal that suitability reports be required in all circumstances is quite interesting, and one that could be a really good change for consumers. Rules do not currently require firms to provide suitability reports when they give a recommendation not to transfer. The FCA is now proposing that firms provide a suitability report regardless of the outcome of advice. This will be a real benefit, because those who wanted to transfer only to be told that it was not suitable would be able to read through the report in detail. The hope is this would reassure and educate them about the reasons behind the recommendation and the benefits they currently have in their DB scheme.
Charging discussion
The last section of the consultation paper didn’t involve proposals. Instead it offered a discussion about the way in which pension transfers are charged for. This has been an ongoing debate in the financial services industry for many years. There is no right or wrong answer, and I think the FCA realises this. Nonetheless, its focus remains on protecting consumers from harm. To this end, the regulator discusses the potential benefits, or harm, of each of the different transfer charging options.
The discussion focuses on the fact that the FCA believes that pension transfer advice is different to other types of advice, such as that focused on investment alone. It also asks whether this has an impact on suitable charging structures.
The watchdog highlighted a number of reasons why transfer advice has this special status, including the following:
- In most cases, the right advice is to do nothing at all;
- Pension transfer advice is mandatory for transfers over £30,000;
- There is no going back once the transfer has occurred;
- The advice will impact on the long-term outcome for clients because it is in respect of their retirement income.
Although no recommendations were given, the FCA has made it clear it would consider intervening in this area if it ultimately believes it to be necessary.
There are many options available to protect consumers from harm, and although the FCA mentions the possibility of a ban on contingent charging, this wasn’t the only option discussed. The regulator clearly wants to ensure other changes contained within the consultation paper and the previous policy statement are taken into account before any decisions are made.
One area mentioned is that of dealing with adviser remuneration packages that encourage recommendations to transfer. Anything that can be seen to encourage transfers will be something that the FCA will take a very close look at.
Conclusions
The industry didn’t necessarily expect a further consultation alongside the long-awaited policy statement, but in hindsight we should not have been surprised, given the weight of pension transfer issues in need of review or updating. Nonetheless, it still feels like the FCA is making tweaks around the edges rather than tackling the issues head on.
Claire Trott is head of pensions strategy at Technical Connection
