IFAs active in giving transfer advice will have encountered consumers who have already chosen their own investment strategy and simply require the adviser to endorse the transfer.
PS18/20 makes it clear that this will not be allowed. The self investor must give the adviser full details of the proposed investment.
The adviser must recommend the investment strategy as being suitable for the transfer to proceed. This must take account of all the risks, expected returns and charges associated with the proposed investment.
This must be assessed for suitability in the context of the consumer’s needs for future income and the timing and pace at which they propose to withdraw funds.
If the adviser cannot recommend the investment strategy as suitable, they must explain this to the client and cannot recommend a transfer. If the advice to transfer is suitable but the investment strategy is not, the adviser must explain that an alternative investment strategy should be considered.
Where the adviser is uncertain about a consumer’s future intentions or cannot obtain full information about the proposed investment they should not recommend a transfer.
Investment risk and transfer risk
CP18/7 sets out the difference between these two distinct forms of risk.
Assessing a client’s attitude to investment risk, completing a transfer value analysis service (TVAS) to establish the critical yield required to match the safeguarded benefits, is not sufficient to meet suitability criteria.
The assessment of suitability must include a thorough explanation of the risk of transfer, which is distinct from an individual’s attitude to investment risk. This must include the risks of staying in the scheme as well as those of giving up safeguarded benefits.
Aspects of transfer risk should include:
- Longevity risk,
- Inflation risk,
- Sustainability of income, taking account of the proposed withdrawal pattern,
- The need for continuing income and paying for investment advice, time commitment required to manage investments,
- Attitude to restrictions on withdrawals of income from safeguarded benefits if retained; and
- Insolvency risk, including an explanation of the Pension Protection Fund safety net.
All recommendations, whether to transfer or retain benefits, must be given in writing and must meet the Conduct of Business Sourcebook (COBS) requirements of being clear, balanced and not misleading, in the context of a full 'know your client' fact find and suitability test.
Triage to be replaced by guidance
Many advisers have offered a triage service to help those considering their options to decide whether they wish to undertake a full advice process and the charges associated with that. The FCA highlighted its concerns about the blurring of boundaries between guidance and advice in CP18/7.
Some firms have since ceased to offer triage, awaiting further clarification from the regulator.
