Improving the quality of transfer advice

Improving the quality of transfer advice

What do companies active in the pensions transfer market need to do to meet the regulator’s expectations?

To nobody’s surprise, the Financial Conduct Authority is continuing its focus on pension transfer advice suitability. It has released a portfolio strategy letter to advice companies detailing the top risks, in which it still maintains that the quality of advice is not up to standard.

The FCA has also written to more than 1,800 advice companies, telling them they will need to prove the steps they have taken to check suitability and address any failings.

So what do companies active in the transfer market need to do to meet the regulator’s expectations?

First, review your business model and processes. The FCA has yet to make official changes regarding contingent charging. But depending on your charging model, it is likely its decision will have some impact on your business model, so start preparing now.

The regulator has highlighted poor fact-finding as a cause for unsuitable advice. At the centre of the advice process is an assessment of clients’ risk profiles, which includes their attitude to transfer risk specifically. Despite high transfer values, do they understand the risk of transferring out of safeguarded benefits and the guarantees they provide? And crucially, does their risk appetite support a transfer?

Fact-finding needs to also play a part in uncovering the wider context of the lifestyle your client is looking for. ‘Know Your Customer’ information will cover the factual details, including their circumstances and income. But you should dig deeper in a review of, among other things, the client’s retirement income needs, health, and objectives in relation to succession planning. 

Also take the opportunity to check you meet the regulator’s requirements, including maintaining valid professional indemnity insurance for past and current business, ensuring there is no break in your cover.

The FCA will look closely at whether financial advisers have adequate financial resources and insurance, especially for defined benefit pension transfers. This will include reviewing what senior managers have done to maintain PI insurance.

In its July 2019 consultation paper, the FCA also proposed that pension transfer specialists carry out at least an additional 15 hours of CPD a year specifically focused on pensions transfer advice.

At least five of those 15 hours must be from external resources. The policy statement following this consultation is expected in the first quarter of 2020, but companies should be considering how they will be supporting their PTS with this CPD.

The FCA has also told companies to take action to ensure they have adequate compliance resource in their business. Senior management needs to be satisfied that its compliance function has sufficient skills, knowledge and experience to provide robust challenge to their company’s pension transfer business.

Finally, carry out a health check of your advice files. Perhaps you’re having the right conversations with your clients. You are probably delivering the right outcomes. But the FCA will expect your files to back that up. Robust business assurance can help ensure your evidence will satisfy the regulator, avoiding costly remediation further down the line.