New pension transfer advice rules
The Financial Conduct Authority (FCA) has published new pension transfer advice rules.
The regulator is also seeking views on additional changes, including possible changes to adviser charging structures which could influence the outcome of advice.
The new rules and areas for discussion aim to improve the quality of pension transfer advice to help consumers make informed decisions for their individual circumstances.
The new pension transfer advice rules follow FCA proposals published last June, which suggested changes to the rules on advice on transfers from safeguarded benefit schemes. This category of advice mostly covers transfers from defined benefit (final salary) to defined contribution pension schemes, including personal pensions.
A period of consultation followed the proposals and the FCA has now published its final rules to ensure transfer advice considers relevant factors.
The new pension transfer advice rules include requiring transfer advice to be provided as a personal recommendation that takes account of a consumer’s individual circumstances.
This is important and should ensure that individual investors receive advice that is tailored to their individual needs.
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.
Following on from this work, the FCA has also published a consultation paper proposing further changes to its rules and guidance.
This includes requiring advisers undertaking pension transfer advice to have the same qualifications as investment advisers.The Financial Conduct Authority (FCA) has published new pension transfer advice rules Click To Tweet
The FCA 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. The FCA recognises that this is a complex area, where any action taken may have an impact on access to advice.
When I was a guest on BBC Radio 4’s Money Box last month, talking to presenter Paul Lewis about contingent charging, I explained that an adviser is working for free, but only gets paid when they recommend a transfer, in my mind that is the same as a commission.
I also explained that contingent charging is only one driver behind the bad advice we’ve seen in this particular case.
The FCA has decided to maintain the position at this stage that an adviser should start from the assumption that a DB 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.
Commenting on the FCA announcement on pension transfer rules, Justin Corliss, pensions expert at Royal London said:
It is clear that the FCA has been scarred by the British Steel experience. They have found too many cases where scheme members were given unsuitable advice to feel confident that now is not a time to alter the starting assumption.
It is quite right to insist that all advice on transfers must be based on a personal recommendation – transfer advice should never be done in bulk, but must always be based on the individual circumstances of the member.
It is however worrying that both the DB White Paper and the new FCA Consultation Paper propose months more of consultation about further changes. If there are examples of poor practice in the transfer market, these need to be addressed as a matter of urgency.
Responding to the FCA’s announcement on changes to advice on pension transfers, Philip Brown, Head of Policy at LV=, said:
The regulator’s changes to pension transfer advice are welcome news for people approaching retirement. Since the Freedom and Choice reforms, there has been a stark rise in the number wanting to transfer out of their defined benefit schemes and it’s vital that as an industry we ensure there are strong safeguards in place to protect these savers.
We wholeheartedly agree advice on transfers must be a personal recommendation and explicitly showing the value of benefits given up should help ensure people aren’t unduly influenced by a big transfer value.
We are also pleased to see the publication of a second consultation paper as, with so much at stake, it’s right the regulator continues to look at this market. In particular we welcome the review of contingent charging as, if an adviser’s fee solely depends on the transfer going ahead, there is potentially a major conflict of interest.
The regulator’s continued focus on this market is absolutely necessary to ensure that only someone who would benefit from the freedoms transfers out, and not anyone who would be worse off as a result.
Our view here at Informed Choice is that personalised advice is essential when it comes to defined benefit pension transfers.
It’s quite right that advisers start from the assumption that a DB pension transfer will be unsuitable, but also that advice to transfer from a defined benefit scheme to a personal pension will be the right thing to do in some instances.
Where it is a suitable course of action, advisers should be able to demonstrate this not only through the use of ‘critical yield’ figures but based on a comprehensive analysis of an individual’s current financial position, future goals and the sustainability of the course of action.
On so-called contingent charging, we believe that this is one factor which can contribute to the proliferation of unsuitable pension transfer advice and more needs to be done to educate consumers about the danger of their advice only getting paid for recommending a product sale.