DB or not DB - that is the question posed by the transfer consultation
On 3 October 2017 the FCA produced something of a snapshot following its consultation on defined benefit (DB) transfers and before it produces a new policy (anticipated in 2018). The question was asked as to how advisers have adapted their business models in response to the significant increase in the DB to defined contribution (DC) transfer market, with a focus on the risk of harm to those who are leaving DB schemes.
In the last two years, the FCA has requested information from 22 firms concerning their DB process. It reviewed files from 13 firms, visited 12 and since the process commenced, four firms have ‘chosen’ to stop advising on DB transfers.
The first part of the update addressed the roles of firms who work with advisers to provide the transfer process, how they delegate various functions and how, in many cases, the advice has been found to be unsuitable.
As we know, pension transfers have long been a specialist service and as such required specialist regulatory permissions. This has caused issues for advisory companies who have the clients but not the requisite regulatory status. To address this, the transfer specialist would work with the adviser to provide the regulated part of the process (there could even be a third party involved, to do the investment).
The FCA has looked at some of these arrangements and criticised the lack of information sharing between the introducer and the ‘specialist’, leaving the specialist with too little information on the client’s needs, objectives and personal circumstances.
The FCA also listed some of the other shortcomings it had found in its dealings with specialist transfer firms:
- Recommendations made without knowing where the money was to be invested
- Recommendations made by the non-specialist
- Lack of comparison between the DB and the receiving scheme
- Lack of consideration of the fund charges and likely returns of the receiving scheme
- Use of default schemes
- Lack of resource causing delay
The point being that such ‘multi-adviser’ arrangements need much better regulation and oversight.
As well as the specialist transfer firms, the FCA looked more generally at the market – the findings were not pretty.
Suitability of advice
The big take away has been the FCA’s concerns on the general suitability of advice. It found that in 88 DB transfers where the advice was to transfer (a little caution is needed here as the sample was quite small):
- 47% were suitable
- 17% were unsuitable
- 40 % were unclear
They also looked at the suitability of the recommended product and investment fund pertaining to that product:
- 35% were suitable
- 24% were unsuitable
- 40 % were unclear
(Comparably, in the Assessing Suitability Review earlier in the year the suitability levels for accumulation and retirement advice were up in the region of 90%.)
Again, the faults were fundamental issues – poor processes; lack of information regarding needs, objectives and personal circumstances; inadequate risk profiling and the lack of a comparison between DB and DC.
So what does all this mean and should it be taken as a true cross section of what is happening across the country?
As I mentioned earlier the sample was small but there was significant difference in complexity between this exercise and that on advice generally. It is also interesting that a large proportion of cases were not right or wrong but ‘unclear’, although the FCA has been quoted as saying that an unclear rating constitutes a breach of Conduct of Business Rules in its eyes.
Either advisers are not being diligent enough in their documenting of the whole process or perhaps they are making a recommendation to transfer with less information than they would have had in the past. This could well be due to the fact that many clients are keen to get a positive recommendation from their adviser as quickly (and cheaply) as possible. Transfer values are currently high and the availability of a high value that is only guaranteed for a short time with the possibility that it could fall could certainly focus the mind on getting that positive decision.
The FCA consultation has also shown some of the new ways of thinking for the transfer process from some of the shortfalls illustrated in the update.
Many of the updated assumptions of TVAS are going to be updated in APTA (details still to be announced) but the focus of such quantitative assumptions has moved from just looking at the transferring scheme to bringing in the destination of the money, as well as the planning needed to achieve a similar benefit based on investment planning and capacity for loss (focusing on new products, the investment funds and charges on those funds). Although I must admit there will be little difference between receiving the product and the funds and charging of that product.
There is a big quantitative issue involving the sacrifice of a guaranteed income but there are many iterations of the qualitative issues – death benefits, paying off debt, a need for inflation proofing, the viability of the sponsoring employer and even the percentage of wealth represented by the TV. These are difficult subjects to shoehorn into a rigid ‘tick box’ process.
So what might happen next?
At the moment I am assuming that nothing has provided a negative outcome – some poor advice and some unclear advice. If that is the case then there is a strong message for all in this market to get back to the details of COBs 19 and make sure processes and procedures are watertight. I also raise the issue of redress. I would suggest it is virtually impossible to reinstate members into DB schemes. Moreover how is a bad outcome measured, particularly if the reason for a transfer is documented as a qualitative one but any future complaint is based on a quantitative one?
The big elephant in the room has been pension freedoms. Under one pension regime the need for a guaranteed income does not exist and indeed the abolition of the need to buy such a guaranteed income sends signals to consumers, perhaps that a guaranteed income is not so important and that there is a choice over how to spend the money. However, under the ‘other’ pension regime a similar individual will have to pay for advice to access his money, even to the point that he pays and the advice might be not to transfer.
The whole transfer process is complicated and uncertain – advisers talk to me about ‘liability’ rather than relationships – we need to mend the trust between advisers and clients in dealing with what we must not forget is first and foremost the client.
Perhaps we could produce some form of detailed guidance that is very strict and to-the-point on the downsides of transferring – a triage process if you like. A similar effect might be achieved by a ban on contingent charging – will people be less likely to try the process if they have to pay an advice cost, whether they take out a contract or not?
Whatever we do, simplicity and trust should be the foundations of the process.