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Seven key points from the FCA's DB transfer consultation

The Financial Conduct Authority (FCA) yesterday published what could be a crucial consultation paper for the future of pension transfer advice. We take a look at the points advisers might want to weigh in on.

With pension transfer advice, and in turn the Financial Conduct Authority (FCA), under more scrutiny than ever before, the regulator yesterday published its ideas on 'Improving the quality of pension transfer advice'. 

We have picked out the issues advisers may want to have their say on if they hope to steer the profession towards safer grounding on the most contentious saga in recent memory. 

With pension transfer advice, and in turn the Financial Conduct Authority (FCA), under more scrutiny than ever before, the regulator yesterday published its ideas on 'Improving the quality of pension transfer advice'. 

We have picked out the issues advisers may want to have their say on if they hope to steer the profession towards safer grounding on the most contentious saga in recent memory. 

Requiring pension transfer specialists to have an investment advice qualification

Existing rules require that all pension transfer advice must be either given or checked by a pension transfer specialist, with the exception of guaranteed annuity rates, and this is distinct from advice on how the funds are invested.

As part of its renewed focus on the destination of pension assets, the FCA is now suggesting a requirement that the pension transfer specialist hold the Level 4 retail distribution review (RDR) qualifications for advising on investments before they can advise on or check pension transfer advice. This must be acquired by 2020.

The paper stated: 'While a pension transfer specialist may not always be giving the investment advice, they need to be able to identify whether a proposed investment solution is consistent with the client’s needs and objectives for the proposed transfer. This will require knowledge and understanding of the different types of investments available, along with their related risks and associated costs.'


Changes to pension transfer specialist exam qualification standards

Taking into account 'developments in the pensions landscape' following the introduction of the pension freedoms and the mandatory advice requirement, along with rules and guidance contained in the latest policy statement and consultation paper, the FCA has proposed changing the pension transfer specialist exam standards.

It said: 'The exam standard will, therefore, cover personal
recommendations and advice boundary issues, appropriate pension transfer analysis (APTA) and transfer value comparator (TVC), overseas advice and taxation.'

Changing the definition of a pension transfer

Feedback received on the FCA's original consultation on DB transfers noted the existing definition of a pension transfer includes movements of 'some non-safeguarded benefits, potentially classifying them as transfers unnecessarily'.

The regulator has proposed an amendment that would see the definition only cover advice on transactions where flexible benefits are given up when the cancellation rules apply, i.e. in the same way as other pension switches. 

It adds: 'Where such switches involve an FCA-regulated pension scheme (either ceding or receiving), personal recommendations will still need to meet our suitability requirements in COBS 9. We have created a new definition to incorporate FCA-regulated pension schemes just for the purpose of the pension transfer definition.

'We have also amended the existing references to an ‘individual pension contract providing fixed or guaranteed benefits’ and to a ‘deferred annuity policy’ with an overarching term of ‘deferred annuity contract’.'

Guidance on the 'two-adviser model'

The regulator set out new expectations for firms operating a 'two-adviser model' on pension transfers, with an investment adviser and a PTS working together, including outsourcing of one or the other.

The report stated: 'The information on the client’s attitude to transfer risk should inform both the pension transfer advice and the associated investment advice. This means the transfer advice should take into account the risks of giving up a valuable benefit; and the investment advice should take into account the fact the client would no longer have a safeguarded benefit if the transfer proceeded.

'Firms who use these models should ensure robust arrangements and processes are in place with other firms they work with, so roles, responsibilities and liabilities are clear.

'For example, responsibility for implementing the transfer itself, establishing liability if funds are not transferred to the expected destination fund and how disagreements between adviser firms are handled. Contractual arrangements and file records that state each adviser’s actual role in providing advice are likely to be helpful if there is a complaint. It is important to be aware that firms cannot outsource any liability for the actual advice they have provided.'

The overarching expectations can be summarised as expecting both parties to collect necessary information to inform both pension transfer advice and associated investment advice. 

Firms are also expected to undertake risk profiling on attitude to both transfer and investment risk, and to recognise that advice should take into account the impact of the loss of safeguarded benefits on the client's ability to take on investment risk. 

New guidance on 'triage' services

The FCA suggests that if initial triage guidance on a transfer is to truly be seen as a non-advised service, it should be an educational process enabling customers to make a decision to proceed to regulated advice or not.

By definition, this must be generic information on the pros and cons of pension transfers. Even if a client reveals personal circumstances, if the firm wishes to avoid giving advice, it should not comment with this information in mind at the triage stage on whether a transfer should be considered.

The FCA also recommends firms explain the transfer process and charges in their entirety at this stage. 

The paper adds: 'It would be good practice for firms to keep records where triage has been provided and the form it took. This is likely to be in firms' interests in case of future complaints.'

Guidance on assessing attitude to risk

Complementing existing guidance on assessing attitude to risk, the regulator set out expectations for firms when considering attitude and understanding of giving up safeguarded benefits for flexible benefits. 

These include:

  • Risks and benefits of staying in the safeguarded benefit scheme.
  • Risks and benefits of transferring to a flexible benefits scheme.
  • The client's attitude to certainty of income through retirement.
  • Whether the client is likely to access funds in an unplanned way, and the impact of this on sustainability of funds.
  • The client's attitude to restrictions on their ability to access funds in a safeguarded benefits scheme.
  • The client's attitude to, and experience of, managing investments themselves or paying for them to be managed in a flexible benefit scheme.


Requiring suitability reports on negative recommendations to transfer

The regulator has proposed new requirements for firms to provide suitability reports when they advise a client not to transfer, which they do not currently have to do.

The proposal states: 'Providing a client with certainty that it is not in
their best interests to transfer, and setting out the reasons why, is just as constructive as an outcome with a recommendation to transfer. An adviser will have considered a client’s retirement income objectives and needs, and reached the conclusion based on their personal circumstances.

'While we recognise there may be a modest increase in charges for some consumers, depending on the charging model, it is important for consumers to receive a suitability report that summarises the issues, regardless of the conclusion. They will also have a record of the reasons why remaining in a safeguarded benefits scheme is the most suitable outcome for them.'

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