Defined BenefitJun 9 2020

Dos and don'ts when giving DB transfer advice

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Dos and don'ts when giving DB transfer advice

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.

Accepting referrals

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.

Conflicts of interest

When giving DB transfer advice, firms should be particularly aware of and manage conflicts of interest where the firm’s interest in the outcome of a service provided to the client is separate from the client’s interest in that outcome, the FCA warned.

As an example of good practice the regulator suggested a firm that operated a centralised investment proposition, which meant it would profit from ongoing advice charges and easier administration if it recommended a transfer and its CIP solution.

To demonstrate that it managed this conflict of interest the firm would disqualify the pension transfer specialist if its pre-sale business review function identified that a transfer and investment into the CIP had been recommended when it would not be suitable. 

Poor practice on the other hand would include a firm whose manual states that when advising clients in ill-health to transfer out of a DB scheme, the adviser should consider recommending the client should go into drawdown and take ongoing advice.

By setting out a process that did not adequately recognise the role of lifestyled or impaired life annuities, the FCA said this would show the firm was prioritising itself over the client.

Financial promotions

When advertising on online search engines to attract new clients, firms are not allowed to use misleading wording, the FCA warned.

For example, if a firm were to state that "the higher the transfer value, the more likely it is to be suitable" or that it could help savers access their funds without acknowledging that the client may be advised not to transfer, then this would be poor practice.

Instead the firm should state that through its advice it will either show the transfer is in the best interest or that it is unsuitable and therefore the best outcome would be to stay in the DB scheme.

Managing carve outs

On Friday (June 4), the regulator announced it was pushing ahead with its ban on contingent charging in most circumstances, with only consumers with certain identifiable circumstances, such as individuals suffering from serious ill-health or experiencing serious financial hardship being exempt.

In the minority of cases where contingent charging is permitted, advice firms will have to charge the same amount, in monetary terms, for advice to transfer as they charge when the advice is non-contingent.

But the FCA warned firms must have a "clearly defined policy" on how to deal with these types of clients.

This would set out a requirement to record details of eligible clients in a register, including the reasons the client was eligible and the outcome of the advice, as well as first offering abridged advice to confirm eligibility for the exemption.

The FCA warned firms should not use carve outs as a way of attracting business.

In its example of poor practice, the FCA stated a firm should not "offer ‘free’ transfer advice to entice consumers to use the firm".

Checking understanding of advice

For a firm to be sure that their client has correctly understood the advice they have given, it should devise a list of open questions relevant to each client rather than generic.

For example, a firm could ask how the lifetime allowance would affect their decision to transfer.

It could also ask the client to explain what might make them regret their decision to see just how comfortable they were with going ahead with the transfer.

Poor practice would be to simply make the client fill out a tick box form as this is likely to be generic which means it does not demonstrate any level of understanding from the client.

Scheme data template

The FCA's guidance also includes a standard template for advisers to use when collecting DB scheme data.

The template sets out the information a firm should consider collecting about the ceding arrangement to be able to give pension transfer advice.

Last year, the Pensions Administration Standards Association launched an industry-wide DB transfer template, after working with the FCA, for schemes to use to reduce the number of information requests from advisers and the time spent on facilitating the DB transfer process.

But the regulator has now published its own version of the template, which it said focuses on the information advisers need to get to give advice, rather than the way scheme administrators should provide the information.

The FCA believes by providing this template it will “streamline the process of gathering scheme information and avoid the need for firms to make repeated requests to schemes”.

This would in turn avoid lengthy delays which often cause a client’s three-month guarantee periods on cash equivalent transfer values (CETVs) to expire. 

However, advisers must still accept the scheme data information if it is provided on the PASA template, or in any other form, the FCA stated.

The FCA is currently consulting on this guidance, which closes on September 4, 2020.

amy.austin@ft.com

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