The Financial Conduct Authority published the findings of its recent investigation of pension transfer advice today (December 6), saying less than 50 per cent of the advice it had reviewed was deemed suitable.
The regulator had looked at 18 firms, which had given advice to 48,248 clients on their defined benefit pension schemes resulting in 24,919 actual pension transfers, since April 2015.
The FCA said it had continued to see firms with significantly rising volumes of transfer business, but risk management and resources had failed to adequately match the growing demand.
The regulator found that either through a lack of understanding of pension transfers or because they did not adequately oversee the activities of their advisers, several firms' senior management had failed to identify and mitigate associated risks.
In firms where senior management had recognised the high risk nature of transfers and put in place additional controls such as enhanced compliance engagement, suitable advice was more prevalent.
Of the 154 transfers reviewed by the City watchdog, a mere 48.1 per cent were found to have been suitably advised.
The FCA said it had observed firms using "generic objectives" in fact finds, such as 'flexibility' or 'increase pension', without exploring whether the client was able or willing to take the risk necessary to achieve the objectives.
It stated: "We observed firms using generic objectives to justify a transfer, without obtaining the necessary information about those objectives.
"For example, basing a recommendation on the client’s objective to take control of their pension without exploring the reasons for this - this prevents the firm adequately assessing whether the client is able or willing to take the risk required to achieve their objectives."
Some firms had also been found to be prioritising the provision of ‘death benefits’ for spouses and dependants in the event of a client’s death without exploring alternative options.
The FCA said a number of firms had failed to consider a client's needs and circumstances when making a recommendation.
It said: "We observed some firms failing to adequately take into account the client’s proposed retirement date or the costs of the receiving scheme.
"In some cases this led to firms recommending clients invest in schemes where the aggregated charges had the potential to negate future investment returns so the client was unlikely to financially gain by transferring and had a high risk of being worse off."
In some cases, firms had failed to obtain the necessary information about a client’s income and expenditure before making a recommendation.
The FCA said: "For example, some firms recommended clients use a pension commencement lump sum to repay debt or buy a property without obtaining details about the amount needed or exploring alternative finance options.
"Others assumed the client wants or needs a similar income to what they are currently earning, instead of obtaining details on what retirement plans the client actually has or what their income needs are likely to be in retirement."
The watchdog also found some firms to be recommending clients transfer multiple defined benefit schemes without considering whether the client only needed to transfer one scheme to meet their objectives.
Some firms were found to have failed to take into account longevity prospects beyond average life expectancy to inform an assessment of the sustainability of income.
In failing to assess the risk a client was willing to take, the regulator found some firms relied on investment risk assessment tools not designed for defined benefit schemes.
The FCA said where transfer risk was assessed, it witnessed some firms using unbalanced language which was likely to steer clients to respond in a certain way.
Firms’ disclosure and communication process with clients was also found to be wanting, with only 29.2 per cent of cases assessed deemed to be compliant with the regulator’s standards.
While some firms presented their recommendations in a clear and balanced way, the FCA said the majority of disclosure failings were driven by the use of standard documentation - particularly in the presentation of initial and ongoing fees.
The regulator observed some firms over-emphasising the benefits and down-playing the risks of pension transfers.
In October, the FCA published new rules for pension transfer advice in a 58-page policy statement which 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 to defined contribution pension schemes.
These included changes to advice process requirements and a new transfer value comparator.
rachel.addison@ft.com
