FCA changes rules on pension transfer advice

The Financial Conduct Authority (FCA) has published new rules on pension transfer advice and is seeking views on additional changes, including adviser charging structures

The new rules framework is meant to improve the quality of pension transfer advice to help consumers make informed decisions based on their individual circumstances.

In June 2017, the FCA proposed changes to the rules on advice on transfers from safeguarded benefit schemes, mainly for transfers from defined benefit (DB) to defined contribution pension schemes. Following consultation, the FCA has published final rules to ensure transfer advice considers relevant factors.

The new rules include requiring transfer advice to be provided as a personal recommendation that takes account of a consumer’s individual circumstances. They also replace the current transfer value analysis with a requirement to undertake a personalised analysis of the consumer’s options and a comparison to show the value of the benefits being given up.

This follows heavy criticism of the quality of advice given to holders of Tata Steel final salary pensions, many of whom were poorly advised to invest in alternative investment schemes.

The FCA has also announced an eight-week consultation, Improving the quality of pension transfer advice, on further changes to its rules and guidance, and plans to issue a policy statement detailing further action this autumn.

This includes requiring advisers undertaking pension transfer advice to have the same qualifications as investment advisers.

It is also seeking views on whether it should intervene in relation to charging structures given the difficulty in managing the conflicts of interest that exist when providing transfer advice.

This could include a ban on contingent charging, which is when a fee for advice is only paid for when a transfer goes ahead. This is a complex area, where any action taken may have an impact on access to advice.

Commenting on the plans for a review, Kay Ingram, director of public policy at LEBC, said: ‘We would support a ban on contingent fee charging for this advice. We cannot escape the conclusion that a contingent fee structure must inevitably bias the advice in favour of recommending a transfer.

‘All advice should start from an impartial standpoint and needs to take full account of individual circumstances. For this reason we would not agree that advisers should assume a transfer is unsuitable, even if in a majority of cases it may well be. The consumer is paying for impartial expert advice which takes all of their circumstances into account and that is what they should receive with no bias towards transferring or remaining in the scheme,’ she added.

The FCA has decided to maintain the position at this stage that an adviser should start from the assumption that a defined benefit pension transfer will be unsuitable.

This is to reflect the high proportion of unsuitable advice seen in supervisory work and need for further consideration of how transfer advice should be paid for.

It should be noted that the existing guidance on the starting assumption does not, however, prevent an adviser from recommending a transfer where this is considered suitable for the consumer.

Christopher Woolard, FCA executive director of strategy and competition said: ‘Defined benefit pensions are valuable so most people will be best advised to keep them.  However, where people are considering a transfer, it is vital that they get good advice to enable them to make an informed decision. 

‘We are also looking at whether further changes are needed to improve the quality of advice in this area.  In particular, we recognise that there is an inherent conflict of interest when advisers use a contingent charging model so we are asking for views on whether we should ban contingent fees for pension transfer advice. Defined benefit pension transfer advice continues to be a key area of focus for the FCA.’

FCA Policy Statement 18/6: Advising on Pension Transfers https://www.fca.org.uk/publications/policy-statements/ps18-6-advising-pension-transfers

Consultation Paper 18/7: Improving the quality of pension transfer advice issued 26 March 2018 closes for comment on 25 May 2018

Report by Sara White

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