Steps to offering robust DB transfer advice

But DB transfer advice remains controversial, and the trade press is full of stories about how difficult many firms are finding it to obtain adequate professional indemnity insurance to cover their advice at an affordable cost.

In July, research found that pension advisers who renewed their PI insurance policies in the previous six months saw their premiums rise on average by 21 per cent. This has led to some businesses pulling out of advising on DB transfers altogether.

So what can you do to convince PI insurers that your DB transfer advice is not high-risk business that they should either avoid entirely, or charge you through the nose for?

Key Points

• Many businesses are finding it difficult to obtain adequate PI cover
• There are a number of questions advisers need to think about if they are to convince insurers that their advice process is not high risk  
• The extra risks presented by contingent charging mean advisers need robust evidence to demonstrate they are prepared to advise against unsuitable transfer scenarios

Based on our experience of independently assessing the quality of DB transfer advice, and with a view to providing your PI broker or insurer with sufficient evidence, here are five questions we think you need to be able to answer convincingly.

1. Can you prove you are not order-taking or providing formulaic advice to transfer out?

Let us assume your business has advised 20 clients to transfer out of DB schemes during the past 12 months, up from 10 in the previous year. In isolation, this statistic does not tell us much about whether your default assumption is that DB transfers are unsuitable for most people.

To help put your best foot forward when dealing with PI insurers, try to provide the following information to put these 20 clients into context:

• How many DB transfer enquiries (including those casual questions asked by existing clients) did you turn away without providing formal advice because it was evident that a transfer was not a good idea?
• How many clients received a written recommendation not to transfer?
• How many clients received a recommendation to transfer out of one DB scheme, but to retain another one?
• How did the proportion of recommendations to transfer out change from one year to the next?
• If the 20 clients you recommended to transfer out have obvious characteristics that support the suitability of the transfers (for example, very strong income/asset position or compelling objectives) have you compiled the management information to demonstrate this clearly?

2. Can you be sure the quality of your advice is as good as you think it is?

Ask yourself who is responsible for challenging the quality of your business’s DB transfer advice, both internally and externally, and how you can demonstrate this to a PI insurer. Consider how you would answer the following questions:

• Does a person within your business with the necessary experience and clout complete a checklist to rate the quality of the advice and the suitability report?
• Does an independent external expert review most or all DB pension transfer cases to check whether the client files can evidence suitability in line with FCA expectations?
• Do you have management information from any internal and external checks showing how many cases were reviewed, the results of the checks, and how any remedial actions were implemented?
• Do your advisers discuss DB transfer cases between them to make sure they are all comfortable with the recommendations in light of the clients’ objectives and circumstances? If so, great, but it is advisable to keep some evidence that these discussions take place (for example, taking actions or minutes from meetings, or a note in the DB transfer client file).

3. Have you identified your target market for DB transfer advice?

One way of demonstrating that your firm has thought about which types of clients are best suited to DB transfers is to conduct a target market assessment. This will be a similar exercise to the Markets in Financial Instruments Directive II product governance process you should already be familiar with, and the five target market criteria published by the European Securities and Markets Authority should provide a useful guide. 

Once you have produced your target market assessment for DB transfers, consider how to show evidence that you have implemented it with your advisers, for example, that you can prove that recommendations are consistent with your target market, and that you can justify any exceptions. 

4. Do your suitability reports inspire confidence?

Go back and read suitability reports from a few DB transfer cases that your business has been involved in. 

By the time you have got to the bottom of the first page, is it clear what is being recommended and why that makes sense in the light of the client’s objectives and circumstances? If so, that will go a long way to inspiring confidence in a third party that the quality of your advice and communication with clients is good. 

On the other hand, wading through 30 pages of a poorly structured, repetitive letter full of technical pension information and risk warnings, but still being none the wiser about why the transfer is a good idea for this client, is likely to leave a PI insurer with the opposite impression. 

5. How have you identified and managed conflicts of interest?

In our view, the best way to demonstrate that your advice on DB transfers is not under pressure from potential conflicts of interest is to avoid (a) contingent charging, and (b) over-relying on fees for implementation of a DB transfer, rather than fees for the advice and recommendation. 

But let us say that you do use contingent charging for DB transfer advice, or have done so until recently. Is there anything you could do to convince your PI insurer that you are alert to the dangers of conflicts of interest and have controls in place to avoid them?

Your conflicts of interest register should show that you have identified the potential conflicts from contingent charging, and that you have documented the steps you take to manage them. 

So what controls would be relevant for this purpose?

Essentially, the extra risks presented by contingent charging mean you will need particularly robust evidence to demonstrate you are prepared to advise against unsuitable transfer scenarios, and that the quality of your advice has been independently verified.

This information will help persuade PI insurers that you identify and appropriately manage any conflicts of interest.

Neil Walkling is managing consultant in the investment team at Bovill