The FCA’s continued spotlight on DB transfer advice
Filter by —
Advice on defined benefit pension transfers has been high on the regulatory agenda ever since the FCA issued an alert on DB transfers in October 2017.
Now the FCA has started setting the stage for what’s to come in 2020. In its recent portfolio strategy letter to financial advice firms, it again flagged DB pension transfers as a continuing area of concern, pointing to inadequate fact-finding in particular.
The regulator also confirmed that it’s written to 1,841 advice firms about the suitability of their advice and the potential harm to consumers – that’s more than half of the market, which gives some indication of the sheer scale of the problem. Firms will need to evidence what steps they’ve taken to check suitability, and address any failings.
Simply put, if you’re active in the DB transfer market, you should be taking action now to make sure you’re meeting FCA expectations.
So, where do you start?
Review your business model and processes
Last year, the FCA began consulting on a ban on contingent charging to address the inherent conflict of interest. We’re yet to see what official changes will be made, but depending on your business model it’s likely that your charging structures will be impacted, so you should be preparing now.
Keep your clients’ interests front and centre
The hallmark of suitable advice is good fact-finding. It’s a given for any adviser worth their salt, but the FCA has repeatedly suggested that standards, on the whole, aren’t good enough.
- Assess attitudes to risk: a detailed assessment of the client’s risk appetite is the crux of the advice process. This includes assessing their attitude to Transfer Risk. You need to make sure your client fully understands the risks of transferring out of a safeguarded benefit, with all the guarantees they provide. And, more importantly, does their risk profile support the recommendation? While clients might be swayed by high transfer values, if they don’t fully understand the longevity and investment risks involved, then a transfer may not be suitable.
- Consider the wider circumstances: while Know Your Customer information will cover the factual stuff including their circumstances and income, adequate fact-finding should also include an in-depth review of the client’s desired lifestyle, retirement income needs, health and their objectives when it comes to succession planning, among other factors.
Check your professional indemnity insurance
As part of its wider work on DB pension transfer advice, the FCA asked for evidence of the professional indemnity insurance (PII) of 1,700 firms. Now, in its recent portfolio strategy letter, the FCA has said it’s concerned that adviser firms might not have adequate cover for the business activities they carry out. There’s particular concern about cover for DB pension transfer advice, and the FCA has already stopped more than 20 firms giving DB transfer advice due to a lack of PI cover.
Whatever business you’re doing, check you meet the regulator’s requirements. This includes maintaining valid PII for past and current business, with no break in the cover. The FCA has said it will be looking closely at whether financial advisers have adequate financial resources and insurance, including checking the steps senior managers have taken to maintain PII.
Think about the additional CPD requirements for PTSs
In July 2019 the FCA proposed that, alongside their existing CPD requirements, pension transfer specialists (PTSs) need to carry out at least an extra 15 hours of CPD a year, focused on pensions transfer advice. At least five of those 15 hours must be from resources outside firms the PTS works for.
We’re expecting the policy statement following this consultation in Q1 of 2020. However, you should already be considering how you will support your PTSs with this new CPD requirement.
Make sure you’ve got adequate compliance resource
The regulator has told firms to take steps to make sure you have the compliance resource you need in your business. A lack of staffing will not be an accepted reason for not meeting your regulatory requirements. Senior managers need to be completely satisfied that the firm’s compliance function has the sufficient skills, knowledge and experience to confidently challenge the firm’s pension transfer business.
Need to bolster your existing compliance team? Find out what we can do to give you the ongoing compliance support you need to satisfy the regulator.
Conduct a health check of your advice files
While you might be having the right conversations with your clients and delivering the right outcomes, the FCA won’t just take your word for it. You should be able to evidence the steps you’ve taken to check that your advice is suitable. If your files are telling a different story, your business will be in the regulatory firing line and you could end up with a costly remediation project on your hands.
Whether it’s pre-sale checks or a sample of past business, robust business assurance can make sure your evidence is up to scratch and identify unsuitability before it causes significant harm.
Our team consists of some the most experienced file reviewers and pensions experts in the UK, helping you to spot and address any issues before the FCA comes knocking.
Find out how our high-performance service helped a a global insurance and pensions provider review its pension transfer advice to tight timescales.Read the case study