It’s unclear what the Financial Conduct Authority expected when it issued its latest ‘dear CEO’ letter on March 22: such missives usually represent a rap on the wrists and little more. Either way, its latest communication has had a major impact on the pensions industry.
The letter, sent to the chief executives of self-invested personal pension providers, aimed to make plain what firms need to consider “when designing, marketing and providing pension products”. But instead of providing clarity, confusion ensued: at the time of writing, three firms had stopped accepting defined benefit pension transfers in response.
Nothing in the pensions space has been more controversial than DB transfers in the past few years. The combination of pension freedoms and rocketing transfer values has led many to transfer out of schemes historically considered to be ‘gold-plated’.
But as the fallout from the British Steel Pension Scheme affair continues to reverberate around the industry, the outlook for transfers is unclear. Recent data points towards an interesting year ahead: it shows that while transfer values are still rising, volumes are heading in the opposite direction.
The recent FCA letter has added a further twist to proceedings, particularly in relation to the wording of the following statement: “We expect you to have appropriate measures in place to ensure that products are being recommended responsibly and appropriately, in accordance with the treating customers fairly principle. We also expect you to ensure that your messages to firms put good customer outcomes at the forefront, and do not encourage firms to make inappropriate recommendations to consumers.”
Many providers assumed that this implied transfer suitability lies with them as well as with the adviser. This has resulted in Intelligent Money, DP Pensions and Westerby all deciding that the regulator’s stance is too ambiguous to risk entertaining DB transfer business.
Julian Penniston-Hill, chief executive at Intelligent Money, says his firm was already uncomfortable with dealing with DB transfers, and describes the letter as “the final straw that broke the camel’s back”.
“We don’t like this type of business, it’s hugely expensive for us to hold, and now the liability has gone up. It’s a no-brainer,” he says.
The FCA has since moved to ease fears by confirming that providers are not responsible for the advice, but many firms are still spooked by the initial correspondence. Westerby has said it will halt transfer business until the FCA further clarifies its position.
It therefore raises the question as to whether this is purely the start of what will be a mass exodus. Mr Penniston-Hill thinks other firms will follow suit. He says: “They’d be mad not to. We’re a sizeable provider but privately owned, so protecting our clients and advisers protects us.”
Some, however, suggest this is an overreaction. Alan Chan, director at IFS Wealth & Pensions, feels the firms in question have got the wrong end of the stick.
“They feel they will be held responsible for the suitability of the advice given by the adviser,” he says. “However, the letter does not say this, nor does it state that they must check the recommendation to transfer is suitable.