Out-Law News | 16 Jun 2020 | 11:43 am | 2 min. read
The UK’s Financial Conduct Authority (FCA) has unveiled a package of measures designed to address weaknesses across the defined benefit (DB) transfer market, including steps to reduce conflicts of interest by banning contingent charging.
The measures, announced in a policy statement (149 page / 1.9MB PDF) also include help for advisers to provide good quality advice to customers, and support for customers transferring out of a DB scheme.
The FCA said the ban on contingent charging would remove the conflicts of interest that arise where a financial adviser is only paid if a transfer takes place. Advisers must now consider an available workplace pension as a receiving scheme for a transfer and, if they recommend an alternative solution, demonstrate why that alternative is more suitable.
Pensions law expert Robert Tellwright of Pinsent Masons, the law firm behind Out-Law, said contingent charging had attracted significant debate within the pensions industry.
“Some advisers would argue that this is a useful means of making affordable advice available to the market. The FCA has finally concluded that the risks these structures present to consumers – including the inherent conflicts of interests – outweigh those perceived benefits,” Tellwright said.
The FCA has finally concluded that the risks these structures present to consumers – including the inherent conflicts of interests – outweigh those perceived benefits.
“The requirement for advisers to consider an available workplace pension as a receiving scheme for a transfer should also help to address ongoing conflicts, which can arise where members are placed into unnecessarily complex arrangements after the transfer and charged high ongoing advice fees for the privilege,” Tellwright said.
The FCA has also issued a consultation over guidance (93 page / 1.5MB PDF) which will help advisers put in place processes to help consumers get suitable advice. The consultation covers the full process of giving advice on DB transfers, and follows research carried out on the suitability of advice.
That research found the suitability of advice had risen from 47% to 60% in 2018, but 17% of files contained unsuitable advice. The FCA said this was “unacceptably high”. The regulator is producing an ‘advice checker’ and information for consumers which will be made available in due course.
Pinsent Mason’s Tellwright said progress in improving the suitability of transfers advice was slow.
“It is alarming that despite the FCA’s ongoing engagement in this area, roughly one in six files examined by the FCA appeared to show unsuitable advice. This illustrates the level of risk members are exposed to when considering a transfer,” Tellwright said.
Tellwright said the FCA findings, together with the guidance consultation, should prompt action by trustees and advisers alike.
“Many pension scheme trustees have sought to improve advice standards for their members, by directing them to a preferred independent financial adviser (IFA) who can demonstrate a strong track record and a robust and impartial advice process. For trustees who have yet to do this, the FCA’s findings on the levels of unsuitable advice may be a timely prompt for them to add this to their agenda,” Tellwright said.
“Trustees should also maintain an ongoing dialogue with their preferred IFA, to understand what measures they will put in place in response to the FCA’s findings and its guidance consultation designed to encourage best practice,” Tellwright said.
A recent report from Action Fraud found that the total number of pension fraud cases since February 2020 totalled more than 2,100, with over £5 million lost due to fraudulent activity. Pensions litigation expert Ben Fairhead of Pinsent Masons said: “This all feeds into a wider picture at the moment of a need for heightened awareness of the risk of scams and mis-selling – all the indications are that there are plenty of unscrupulous individuals out there ready to play on economic uncertainty and mislead members into making ill-advised transfers.
“There is likely to be considerable scrutiny of DB transfers made during these times both from an FCA perspective and by the Pensions Ombudsman to the extent members lose out,” Fairhead said.
“It is critical that the FCA drives up standards in this area, particularly in the current economic climate where members are understandably concerned about their financial futures and vulnerable to making rash decisions,” Tellwright said.
The policy statement and guidance consultation follow a ‘dear CEO’ letter sent by the FCA to financial advisers earlier this year, reminding them to provide suitable advice to customers.
30 Apr 2020