FCA stepping up action on DB pension transfers

A new Dear CEO letter to financial advisers shows the FCA is not letting up when it comes to defined benefit pension transfer advice. Following their findings that only 50% of advice in the DB market was suitable, the regulator has taken comprehensive steps to force the sector to address its concerns. From what we’re seeing, firms in this area are receiving some close scrutiny, with some having to carry out a complete back book review or even put pensions advice on hold.

At the end of 2018 the FCA sent a questionnaire to all firms with DB pension transfer permissions. Over the last few months the regulator has been following up the analysis of the data for specific firms.

Specific actions to investigate

The FCA sent a letter to around 1500 firms requiring specified actions to investigate and mitigate the risks from their DB pension transfer business. Depending on the firm’s responses to the original FCA questionnaire, their actions will be under some or all of the following headings:

  • Volume of transfers
  • Conversion rate (proportion of clients who are advised to transfer)
  • Insistent clients
  • Unregulated Introducers
  • Recommending Expensive Solutions

Depending on how many categories of actions they were sent, firms were given one or two months to respond. Generally, the actions required re-checking at least some transfers recommended during the last few years for suitability.

File reviews and visits for high volume firms

Some firms have received a one or two day visit to assess the robustness of their DB pension transfer advice process and control framework. The visits involve interviews with key staff such as pension transfer specialists, senior management, compliance and monitoring staff. Generally speaking, the visits appear to be targeted at firms deemed to advise on high volumes of transfers. Before the visit, the FCA selects two recent DB pension transfer client files to review, and it refers to those files as it asks questions about advice process and controls. The FCA insists that it doesn’t assess those files for suitability – but the experience of firms we’ve spoken to indicates otherwise.

Suitability reviews

Depending on their questionnaire response, and the outcomes of the visit, the FCA has asked some firms to send a sample of six DB pension transfer client files (from before October 2018) to review for suitability, with another 14 held in reserve (which it will review if it finds significant problems with the initial six).

Back book reviews

For some firms, the outcome of the FCA visits or client file reviews has been that the regulator has asked them to pause advising on DB pension transfers, or relinquish that permission altogether. In addition, some have been asked to conduct a full back-book review of all DB pension transfer recommendations made since the advent of pension freedoms in April 2015.

New Dear CEO Letter for financial advisers

The FCA highlighted it’s focus on DB pension transfer advice in last week’s portfolio strategy letter for financial advisers. The letter published on 21st January highlighted the increasing number of cases where firms’ actions resulted in “significant harm” to consumers. Advisers were urged once again to “start from the assumption that a pension transfer is not likely to be suitable” and to make sure they had identified and managed the risks associated with DB transfer business. This included conflict of interest caused by charging structures for both advice on the transfer and ongoing investment advice.

The FCA also warned inadequate fact finding would create a “high risk” the advice would be unsuitable, urging advisers to gather all the necessary information and ensure they have the correct resources — advisory, transfer specialist and compliance — to transfer their client’s pension.

Pension transfers remain top of consumer protection agenda

It’s clear that the FCA is determined to take strong action to drive up the standard of DB pension transfer advice, which it regards as alarmingly poor, and make firms put in the work and spend the money needed to address any significant failings it finds. Given the large numbers of transfers over the last few years, and the fact that only around half of client files are evidencing suitability to the standard expected by the FCA, DB pension transfer advice is likely to remain at the top of the regulator’s consumer protection agenda during 2020.

How we can help

We’re busy helping firms meet the regulator’s expectations and demands when it comes to DB pension transfer advice. We can help you:

  • Validate your responses to the actions in the FCA’s letters, including reviewing a sample of client files for suitability, and assessing the effectiveness of your advice process/control framework
  • Prepare for your FCA visit, for example by conducting mock interviews
  • Review suitability for the sample of cases selected by the FCA to give you an idea of what the regulator is likely to make of them
  • Help you to conduct a back-book review of DB pension transfer advice by providing the independent quality assurance and oversight required by the FCA.