The FCA remains focused on pension transfers and the harms it identifies as associated with this activity.
Recent consultation and policy papers describe the FCA’s concerns, where it believes firms need to improve and provides proposed rule changes relating to pension transfer business.
Most recently, this has focused on Defined Benefit schemes and the ‘dangers’ to clients in transferring from them.
CP18/7 focuses on this area, proposing changes including a clear focus on the client’s attitude to investment transfer risk in a manner previously less clearly defined.
CP18/7 also proposes, among several other factors, that advisers need to consider:
- The risks and benefits of staying in the existing scheme and similarly, the risks of transferring;
- The client’s attitude to any restrictions on their ability to access funds within a safeguarded benefits scheme;
- The client’s attitude to certainty of income throughout retirement and the likelihood the client may need to access funds in an unplanned way.
These criteria reflect the current FCA mantra of the need to reflect, in the client's own words, information impacting a description and assessment of investment (and now transfer risk specifically).
The additional goal is for advisers to rely less on metric-based tools as the principal driver behind personal recommendations being provided to clients.
Advisers traditionally assess a client’s attitude to risk on a sliding scale, from cautious to adventurous, or a variety of synonymous terms.
The impact on the client where unsuitable advice has been given will be important, but also important is that advisers consider their advice processes and determine whether they adequately discharge FCA expectations.Advisers need to augment this approach through the recording and reflection of the client’s own terms and attitudinal statements, and capture this in some detail in their work notes.
Failure to do so will (and has for many firms) drawn significant criticism from the regulator, despite there being a lack of prescriptive guidance from the FCA as to its expectations.
While a lack of detailed clarity from the FCA is not a new issue, it is a useful catalyst for advisers to review their practices now, ahead of new rules, which will certainly come.
The FCA has expressed its dissatisfaction with advisers’ approaches to attitude to investment and transfer risk in some cases, by finding that some investment recommendations have been unsuitable.
The impact on the client where unsuitable advice has been given will be important, but also important is that advisers consider their advice processes and determine whether they adequately discharge FCA expectations.
This issue, coupled with the introduction in 2019 of the Senior Managers and Certification Regimes alongside the Conduct Regime (SMCR) for many investment and pensions advisers not currently impacted, merits management action without delay.
The FCA already does and will continue to vigorously seek out those members of senior management at firms with overall responsibility for the advice processes within firms, to hold them accountable for any perceived failings.
Given the link to potential client detriment associated with what may amount, at least in the FCA’s eyes, to unsuitable advice, firms can expect enforcement action and/or supervisory measures, including the use of section 166 reports to become standard responses to perceived regulatory failings in this area.
To avoid this fate, a review of the systems and controls in place at the adviser, together with a close review of the advice process, is recommended.
This should focus on the level of detail of personal response and feature information collected from each client and how that information is used as part of the assessment of any advice provided to the client.
Some advisers are linking this process to their SMCR efforts to streamline management resource and ensure management ‘buy-in’ on what is a fundamental process for advisers in this space.
Douglas Cherry is a partner at Reed Smith
