The Financial Conduct Authority (FCA) has finally published new rules for pension transfer advice.
In a 58-page policy statement published today (4 October) the new rules set out how advice should be provided to consumers on pension transfers where consumers are considering giving up safeguarded benefits, primarily for transfers from defined benefit (DB) to defined contribution pension schemes.
The paper also clarifies that this is far from the end of the FCA’s tinkering with the rules surrounding pension transfer advice.
Here are the five key things you need to know about the FCA’s latest pension transfers rules.
1) More testing times ahead
Pension transfer specialists have until 1 October 2020 to obtain a level four qualification for providing advice on investments if they want to continue to offer their services.
While a pension transfer specialist may not always be giving the investment advice, the FCA stated they do need to be able to identify whether, in the context of overall suitable pension transfer advice, a proposed scheme and investment is consistent with a client’s needs.
Hopes that the FCA would allow gap-filling for those pension transfer specialists who may have passed the relevant exams some years ago were dashed, with the regulator stating everyone would have to pass the level four exams to continue to sign-off transfers from late 2020 onwards.
But an adviser who does not meet the pension transfer specialist investment qualification requirements will still be able to provide pension transfer advice, according to the FCA, as long as their advice is checked by a transfer specialist before the client is given a suitability report.
2) Changes to advice process requirements
When advising on a pension transfer, the FCA stated the advice must take account of the proposed destination of the transfer funds.
This includes both the proposed scheme and the proposed investments in that scheme.
According to the regulator the rules do not prevent two separate advisers providing the pension transfer advice and a recommendation on the proposed receiving scheme and its investments.
However, the FCA expects the two advisers to work with the same information about the client and have in place robust processes to ensure this happens.
The FCA stated both parties should work together to: collect necessary information, to inform both the pension transfer advice and the associated investment advice and undertake risk profiling, which assesses attitude to transfer risk and investment risk.
The regulator stated the two advisers should recognise the investment advice should consider the impact of the loss of any safeguarded benefits on the client’s ability to take on investment risk.
3) Handling insistent clients and explaining risk
Whether the advice is to stick with a scheme or transfer out, an adviser must now produce a suitability report.
According to the FCA the report provides the adviser with a record which should help them if there is a future dispute but it does not change adviser liability; an adviser is always liable for the recommendations provided.
The regulator stated this is the case even when the advice is not to transfer - and so there is no resulting sale of a product - as the regulated activity of advising on a pension transfer results in advice to keep the safeguarded benefit.
Similarly, the FCA stated advice to transfer out of safeguarded benefits carries a liability, as well as the liability for the investment advice on where to transfer the funds.
If a firm chooses to advise self-investors on pension transfers, the FCA stated they must have a clear view on the destination scheme and the long-term investment strategy within that scheme.
The regulator stated this is so they can take into account the risks, expected returns and charges which supports the pension transfer advice.
Where there is uncertainty about the client’s future intentions or the relevant information about particular asset classes is not available, the FCA stated an adviser should not advise on a transfer.
The regulator also explained what is now expected with risk assessments.
According to the FCA, the client needs to be told about risks such as longevity risks and investment risks.
Advisers were told they should also consider sponsor insolvency risk in a balanced way so that any client biases and misconceptions are managed, for instance regarding the benefits provided by the Pension Protection Fund.
The regulator stated it recognises that risk profiling software may currently be more focused on investment risk and portfolio construction.
If an adviser uses software which is restricted in this way, then the FCA said they should determine the client’s attitude to transfer risk in other ways.
The regulator rejected claims the client will be overloaded with information.
4) Calculators at the ready
The transfer value comparator requires advisers to make assumptions about the inflationary increases applied to defined benefit scheme benefits when valuing these benefits.
The FCA proposed a change to the assumptions to use where minimum (collars) and maximum (caps) rates apply to inflationary increases.
These could, for example, be those linked to the retail price index (RPI) or consumer prices index (CPI) provided by a scheme.
To prevent such pension increases being overvalued the FCA proposed that firms should assume fixed rate increases at the collar, for collars above the relevant RPI/ CPI rate; and at the cap, for caps below the RPI/CPI rate.
All other increases should be valued at RPI/CPI.
5) More change on the way
The proposed ban of contingent charging was dropped but the FCA will return to the issue.
The watchdog stated it needs to carry out further analysis of whether there was link between contingent charging and suitability of advice.
If changes to rules around charges "are appropriate" the FCA stated it will consult further on any new proposals in the first half of 2019.
In the meantime, the FCA encouraged firms to check that they meet current requirements on disclosing charges and managing conflicts of interest.
While the FCA also decided not to proceed with their proposal to amend the pension transfer definition right now the watchdog stated it could change in the future.
The regulator stated it would further investigate alternative ways to simplify and clarify the definition of a pension transfer while retaining the existing explanation for now.
In practice, this means that the definition will continue to include some transfers of non-safeguarded benefits.
The FCA also acknowledged that the industry was less than happy with the guidance that it can currently give on what constitutes guidance versus advice.
The FCA stated: "We know that some firms are keen to discuss further with us how they can deliver guidance to consumers for this specific regulated activity, given the narrow scope compared to that for investment advice.
"We have noted their suggested approaches above and will continue to talk to stakeholders over coming months.
"We would welcome further input from interested parties while we consider if any further work is needed in this area. However, we cannot change the boundary."
emma.hughes@ft.com
