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.