With unsuitable pension transfers continuing to grab the headlines, should we be asking, not only why poor advice persists, but why the lack of evidence is not being identified and addressed by compliance oversight functions in firms.
We are getting older, living longer and becoming more financially demanding than ever before.
The combination of increasing life expectancies, low interest rates and difficulty building up savings for older age creates a serious challenge for consumers’ finances in the next stage of their lives.
When viewed from a societal perspective, this presents the potential for significant public harm.
As such, the advice sector is now being subjected to increased levels of regulatory scrutiny.
Deb Jones, FCA director of supervision, life insurance and financial advice has previously joked that one of the barriers to competition in financial services is that many people would far rather invest their time watching cat videos on the internet than spend time searching for a new bank account.
FCA research has shown that the problem is even greater in the pensions sector, where people want better outcomes, know they ought to be engaged, but don't know where to start.
A defined benefit (DB) pension transfer is a potential significant wealth creation event for many people, as well as an opportunity to pass wealth down a generation.
At the same time, it also results in an irrevocable waiving of a valuable lifetime guarantee.
This dilemma presents a vital opportunity for financial advisers to address the information asymmetry in what is a complex decision, and steer consumers to a better outcome.
However, despite clients turning to their advisers for help, regulatory insights show that they are not being appropriately dealt with.
Pension transfer advice is wanting in the majority of cases, with decisions undermined by potential conflicts of interest for the adviser.
In light of this, who should have core responsibility for mitigating these regulatory risks and ensuring that transfers are conducted within a framework that supports good consumer outcomes?
The guidance on the suitability of pension transfers (COBS 19.1.7(G)) clearly states that when a firm advises a retail client on a pension transfer it should consider the client’s attitude to risk, including, where relevant, the rate of investment growth that would have to be achieved to replicate the benefits being given up.
The FCA has repeatedly underpinned this with a mantra that a transfer starts unsuitable until evidenced to be suitable.
In its recent ‘Dear CEO’ letter, it also reminded firms that it expects them to be managing the increased risks associated with DB transfer business.
The regulatory ambition is that pension transfer advice reaches the same standard as the wider financial market, where advice is suitable in around 90 per cent of cases.
Despite firms adding steps around adviser qualifications and pre-checking all pension transfer advice in cases, evidence from the FCA’s last three reviews show that around half of all cases remain non-compliant and therefore not evidently suitable – a long way off the 90 per cent target.