The Financial Conduct Authority (FCA) has published guidance setting out which processes advisers must put in place to deliver suitable defined benefit transfer advice, giving examples of both good and bad practice.
The regulator published its 93-page document, Guidance consultation: Advising on pension transfers, alongside its final rules for DB transfer advice last week (June 5) to help firms identify weaknesses in their existing advice process.
The document provides non-handbook guidance designed to help advisers understand the FCA's expectations when advising on transfers.
The regulator stated: “The aim of the guidance consultation is to improve the suitability of DB transfer advice and the outcomes for individual consumers.
“It also aims to give advisers the confidence to give good advice, so that they and their professional indemnity insurers can see the benefits of less unsuitable advice, making the pension advice market more sustainable going forward.”
In its guidance the regulator provided a number of examples of good and poor practice across topics such as managing conflicts of interest, the use of introducers and charging structure disclosure.
Assessing attitude to risk
When assessing a client’s attitude to transfer risk, the FCA considers it good practice when a firm creates a number of questions to deal with the seven points listed in the regulator’s handbook and to ask these questions at various points during the fact finding and risk assessment process.
The FCA’s example in the guidance states: “When trying to find out if the client would be likely to access funds in an arrangement with flexible benefits in an unplanned way, it asks questions about spending patterns when collecting expenditure information from the client.
“So the firm might find out how the client and their partner manage their money and plan for major expenditure. If they see large credit card or store card debt, they will ask about the history of the debt and if there is a tendency for impulse purchases.”
According to the FCA, poor practice in this area would be if a firm was aware of a client’s relationship with gambling but failed to ask questions including whether the client has ever tried to give up gambling and their current willingness to give up gambling.
If the client were to then transfer, there is a risk they could be tempted to access and spend the remaining funds on gambling, resulting in long term poverty once the client retires, the FCA stated.
When accepting referrals from an unauthorised firm, the FCA expects advisers to not rely on the information provided by the introducer but, as part of their due diligence process to contact the client directly and carry out their own risk profiling assessment.
An adviser should also not rely entirely on an introducer for business or fail to have adequate contact with the client, the FCA stated.
An example of poor practice would be for the adviser to not carry out adequate due diligence on the introducer used and to have minimal oversight of how the introducers use the advice firm’s documents and present the advice to clients.