Defined Benefit  

How DB transfer concerns highlight role of compliance

  • Identify weaknesses in compliance structures
  • Explain how compliance functions should work effectively
  • Explain how FCA concerns over DB transfers should be used as a wakeup call to predict other issues
How DB transfer concerns highlight role of compliance

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? 

FCA expectations

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. 


Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

  1. What is one of the key things a firm should consider when advising a retail client on a pension transfer?

  2. True or false, the compliance oversight function (SMF16) has responsibility for oversight of the firm's compliance with relevant regulations, and reporting to the firm's governing body in respect of that responsibility?

  3. How much was David Watters fined for failing to exercise due skill, care and diligence in his role as compliance oversight officer, firstly at FGS McClure Watters (FGS) and then Lanyon Astor Buller Ltd (LAB)

  4. True or false, the FCA had found that Mr Watters failed to take reasonable steps to ensure that the process for giving advice on mortgage product transfers was adequate and met regulatory standards.

  5. According to Paul Dyer, what is the first step a firm should take to demonstrate their commitment to ensuring clients' best interests are served?

  6. Pick the odd one out. What else should firms consider when ensuring their compliance functions are performing to a high standard?

Nearly There…

You have successfully answered all the questions correctly, well done!

You should now know…

  • Identify weaknesses in compliance structures
  • Explain how compliance functions should work effectively
  • Explain how FCA concerns over DB transfers should be used as a wakeup call to predict other issues

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