Long ReadMar 9 2022

DB transfer advice: has the FCA’s clampdown changed anything?

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DB transfer advice: has the FCA’s clampdown changed anything?
Credit: John Sibley

The defined benefit transfer market is a contentious area wrought with regulatory risk, but has the regulator’s recent clampdown made a difference to those IFAs willing to give it a go?

The Financial Conduct Authority has come down hard on the DB advice space in the wake of the British Steel transfer scandal.

It has removed permissions from advisers who have been giving errant DB advice, and has also banned contingent charging on transfers, to remove bias from the system.

As a result, intervention from the FCA has resulted in a number of businesses – key players in the debacle – stopping their transfer advice service, while others went out of business.

But the issues are not confined to British Steel adviser community. Poor DB advice is widespread and while the regulator has put its foot down to improve the market, it has created new issues.

The overall DB advice sector has shrunk and as it is mandatory to receive advice on transfers worth £30,000 plus, clients are often struggling to find a pension transfer specialist able to serve them.

The high costs associated with professional indemnity insurance have also played a role, with many businesses leaving as they cannot afford to get cover or because they are unable to obtain the insurance altogether.

Matt Connell, director of policy and public affairs for the Personal Finance Society, says: "Access to affordable DB pension transfer advice has been reduced in recent years and will result in people who must take regulated advice to be able to exercise their rights under pension freedoms for DB pension transfers struggling to do so.

“We have seen an increasing number of instances where PII either limits the number of pension transfer cases per year [or] some have removed cover altogether.”

To address this gap, the FCA introduced a new form of advice known as abridged advice, but has it really improved the quality of advice?

Is abridged advice working?

Abridged advice came into force in October 2020 alongside the contingent charging ban. Contingent charging means a client only pays for the advice if they go ahead with a transfer and the regulator thought this set up could create the wrong incentives.

Abridged advice sits in between triage and full transfer advice but can only result in a recommendation to not transfer out. It begins with an introductory chat with the client, where the adviser can get some high-level information about their circumstances to then determine that they are not a viable candidate for a transfer.

A freedom of information request to the FCA, submitted by FTAdviser, found 343 businesses have provided abridged advice since its introduction, but also that 558 businesses are no longer providing transfer advice since the rules came into force.

To put this into comparison, this is out of a total of 1,160 businesses who still operate in the DB market.

FTAdviser understands that the FCA cannot say whether or not abridged advice is a success as it is not mandatory and it is up to businesses to decide whether to use it with their clients. But of those that have decided to give it a go, many are finding they are happy with the results.

'A modern approach'

Dominic James Murray, chief executive and IFA at Cameron James, offers an abridged advice service free of charge.

He says the business decided to give it a go as it is a “modern approach” to DB advice and while there are things not possible under this form of advice, such as cash flow modelling, it does allow advisers to start gathering information about the client before going on to full advice.

“You do a huge amount of work with about 25 or 30 PDFs on [a client’s] situation and their transfer analysis, but we prefer saying to clients, 'Look, we're going to work for free on the abridged report. Once that report comes back, if we really think a transfer is against your best interest, we will tell you at that stage. If we can't determine whether a transfer is suitable for you or not, we will go ahead to the full advice stage',” James Murray says.

“But we do turn down quite a few clients at the abridged stage, which obviously they find pretty valuable.”

Another business that offers this service for free is Hub Pension Consulting, part of Just Group.

Andy McBride, senior pension consultant at the company, says abridged advice offers a lot of benefits for clients and gives advisers more things to talk about.

“It gives a few more touch points, which when we're talking about a subject matter as complex as pension transfers, can only be a good thing,” McBride says. 

“Certainly for those that are a few years off accessing benefits, it can quite often give them a recommendation to stay in the scheme but at much lower cost than having to pay for full advice.”

But not all who give abridged advice do it for free, with others claiming offering this as a pro bono service could be seen as a “conflict of interest” and would see the adviser hit with significant costs through time, resource and potential liability.

Carla Langley, owner of Langley Consultancy Service, says: “On the face of it, free abridged advice simply means that the firm is better off if the client goes to full pension transfer advice, and are worse off if they provide a retain recommendation. So although the FCA clearly states in their guidance paper that a firm can provide abridged advice free of charge, I am not sure how any firm can justify this, and argue that it is in the client's best interest.”

The FCA states where clients proceed with the transfer, advice businesses should offset the cost of abridged advice against the cost of full advice.

Fiona Tait, technical director at Intelligent Pensions, does charge for this service but says it was something the company has thought “long and hard about”.

“We felt it was a valuable service and in practice what we found is that all of our clients felt that they did want to go on to full advice and we were quite happy to continue on this charging basis. But we certainly aren't going to do it for free because there's work being done.”

But others have chosen to steer clear altogether. Alistair Cunningham, financial planning director at Wingate Financial Planning, says from a liability point of view, offering abridged advice is the same as full advice. 

“Albeit the implication of getting it wrong is greater when you tell someone to transfer out and they shouldn't have done, than if you tell them to remain put, and something happens that meant actually that was not the optimal outcome.”

Langley adds for the majority of clients abridged advice “will not be sufficient”.

“Pension transfer advice is so complex, with so many moving parts and things that need to be considered, therefore it’s really difficult to give a clear and definite retain recommendation without going into a full analysis,” she notes. 

“And there lies the risk. It is incredibly easy for a firm to inadvertently cross into full advice without realising they are doing it.”

But has the DB market improved?

Something they do agree on is that the FCA’s clampdown has caused a lot of businesses to leave this area of the market.

This is something the FCA admits itself, saying as a result of its interventions the “market has changed considerably”, but it stands by the fact that there are still more than 1,000 businesses operating.

Langley says the problem lies with how many of the businesses that have left were actually providing high-quality, suitable pension transfer advice. 

She adds: “These are the firms that have looked at their business and thought ‘this area of advice poses too much risk to our business from a number of areas, and therefore that exposes our existing clients to risk’. And on the back of that have removed or limited their permissions. 

“So although the FCA’s actions have reduced numbers significantly, the question we really need to understand is, has it prompted the right type of firms to move out of this space, or have we just lost lots of very good advisers in this area?”

McBride says as a result of the FCA’s clampdown more specialist businesses will emerge and therefore further improve the advice given.

He says what the industry is likely to see is advisers referring clients to specialist businesses without the risk of worrying about the ongoing servicing for the client.

“They still retain the client and keep those relationships, they're just able to outsource this very specialist line of work to a specialist business.”

James Murray observes the change has already occurred, saying DB transfer advice is “dramatically better” than it used to be.

Speaking to other businesses, he says the number of ‘do not proceed’ results has increased, stating this has risen 20 per cent at his business in the past year.

“Two years ago, what we would say to a client is, 'Okay, let's get you booked in and let's continue this conversation',” he says.

“Even before we're in an abridged stage, we now just say to people, 'From a very basic understanding of your situation we think you're a cast iron case as to why you shouldn't transfer'.”

While some say it is still too early to tell whether the FCA has made a real difference in this area, most believe more businesses will bid farewell to the market in the coming years.

Langley says: “Any firm with a good grasp of business risk will be looking at this space and making the assessment as to whether they want to continue to add to a (probably) already significant potential liability in the back book and, irrespective of the PII market for future advice, I suspect many will stay away from this area.”

Amy Austin is news editor of FTAdviser

amy.austin@ft.com