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FCA pension transfer changes

Over the course of the past year pension transfer specialists and adviser firms have been inundated with regulatory changes. The impetus behind these changes is completely understandable, they are not changes for changes sake, they are to ensure that consumers can feel confident in this important area of advice and that advisers feel safe and confident in the advice they are giving.

At the beginning of October changes came into power that required advice in this area to be supported by a new Transfer Value Comparator (TVC). A TVC shows the size of fund needed to purchase the annuity equivalent of the defined benefit (DB) pension that would be given up. It will further show this amount against the transfer value offered.

Now the Financial Conduct Authority have issued a new 34-page policy statement with further changes for these advisers, which can be summed up in five points.


1. Pension Transfer Specialist Qualifications

Pension transfer specialists will now need to ensure they have a level 4 investment qualification by October 2020.

The qualification on its own is not enough and the FCA has confirmed that they are considering a minimum level of CPD for pension transfers. Given the complexity of this area of advice, such a requirement would be welcome and sensible.



2. Taking account of the proposed destination of a client’s transfer funds

One change that comes in right away is the guidance around working with another adviser.

The new guidance, which is included in Conduct of Business Sourcebook (COBS) covers where two advisers from different firms are working together and: where two advisers within the same firm are working together.

The impact on the two-adviser model of these changes is threefold:

  • Client’s needs to be clear on how this model works
  • Both advisers need to be close to the client to obtain the necessary information to undertake their role
  • For advisers from different firms, both advisers should undertake due diligence on each other.

The requirements fall short of requiring both advisers needing to meet or engage with the client personally, but there is a clear focus by the FCA on the quality of the client fact find and how it is used by both advisers.



3. Assessing a client’s attitude to transfer risk

Client’s attitude to transfer has been on the FCA’s radar for a while and best practice has always looked to ensure that a client’s attitude to the transfer was taken into account. This involves what client’s preconceptions and attitudes are before the adviser has given their recommendation. Are they dazzled by the large sums on offer?

This is another area where an advisers’ fact find will need to be updated. How an adviser identifies a client’s attitude to transfer risk will continue to be monitored by the FCA.

It will be interesting to see if technology comes to play in this space as it has done with assessing a client’s attitude to investment risk.



4. Triage Services

This is likely to be the most contentious area with advisers. Triage is very common across the industry and this probably represents the biggest impact of the recent announcement.

The purpose of triage is being able to quickly identify and remove from the process those clients where a DB transfer is clearly not suitable. The FCA has found that this has leapt over into the advice arena.

The FCA has confirmed that triage needs to be a guidance service: it should be educational and present a balanced view of the advantages and disadvantages of transferring: it should not be personalised in any way.



5. Charging structures associated with advising on pension transfers

One area that has divided the industry is contingent charging and, while a ban had been explored, we are pleased to see that a decision has been delayed.

However, advisers need to ensure they are effectively managing conflicts. The FCA are clear they have not had their final say on contingent charging and will continue to explore how it works and if changes are necessary. They could consider introducing further guidance on what it sees as the best way to manage conflicts.


More to come…

As the ongoing investigation into contingent charging flags, pension transfers will continue to be on the regulators radar. It is a pity that the FCA was not able to publish an update of their supervisory work in this area as the findings that were published in Oct 2017 (where 47% of cases were shown to be suitable) was from a small sample size. Since that time, the FCA have reviewed a far larger number of cases and insight into that work would have been welcome.

There are, of course, other nuggets within the FCA’s statement including that it has opened the door for DB schemes and their trustees to offer a TVC alongside a CETV (and remain within the guidance remit). It will be interesting to see if any DB schemes decide to do this and whether TPR will adopt this within their standardized best practice approach to CETV requests.

The regulatory journey of pension transfers continues.

Ian Browne is Pensions expert at Quilter

Financial Adviser Verification