The paper states that it is difficult to prove a clear link between contingent charging and unsuitable advice.
But, that contingent charging creates an obvious conflict and incentive to give unsuitable advice.
On top of contingent initial charges, there is the issue of percentage-based ongoing charges and the potential that this could lead to customers paying more per year in ongoing charges than the estimated time/cost required for an annual review.
The FCA’s suitability requirements have not changed
There were other important considerations, such as a one-page advice summary, risks and comparisons to workplace pensions. Changes to TVCs, cash flow modelling and CPD are also in the mix.
The paper is looking to increase DB transfer suitability rates by removing potential conflicts of interest around charges.
But the FCA’s suitability requirements have not changed, including the starting position that for most consumers a transfer is not in their best interests.
So what are the key drivers for suitability?
The key points of suitability are reiterated in the consultation paper. They are also detailed in the proposals for abridged advice.
Likely suitability can be determined based on:
- high level health information to ascertain if the client has a materially reduced life expectancy
- the client's attitude to risk including their capacity for loss
- the client's attitude to investment risk and their relevant knowledge and experience of investments
- a high-level understanding of the client's financial and family situation, including other pensions and savings
- other relevant information such as whether the client is relocating overseas
While low capacity for risk could be used to say a transfer is not suitable, it may not be the end of the story.
Abridged can either lead to a recommendation not to transfer, or be insufficient to draw conclusions, in which case a client may have to proceed to full advice, (or they could decline to take this further).
A client could have a low capacity for risk but may have a very high transfer value.
Now high transfer values in isolation do not make for suitability. But with a Transfer Value Comparator and robust appropriate pension transfer analysis and rigorous stress testing you could conclude that a transfer could be suitable.
A client could have a low capacity for risk but may have a very high transfer value
As always, the devil is in the detail of the records that are kept.
But at a high level let’s go through a couple of examples showing when a transfer could be suitable and unsuitable.