U-turn as FCA decides to keep DB transfer ‘unsuitable’ starting point; consults on banning contingent charging

The Financial Conduct Authority has backtracked on its proposal to remove the assumption for advisers that a defined benefit pension transfer is unsuitable, instead launching a consultation on whether a ban on contingent charging is needed.

Originally proposed in June 2017, the FCA had considered replacing DB transfer guidance with a statement in its handbook, stating that for most people retaining safeguarded benefits will likely be in their best interests.

Publishing its policy statement on advising on pension transfers today, 26 March, the FCA said that it has decided not to proceed with the proposal on the starting assumption, noting that its recent supervisory work has shown “significant evidence of unsuitable advice being provided”, including its work on the British Steel Pension Scheme.

“Given our concerns about the significant proportion of unsuitable advice, we do not consider it is appropriate to change this assumption at the present time,” it said. Despite this, it revealed that feedback on its consultation had been in favour of moving to a more neutral starting point for DB transfer advice.

Last month, Work and Pensions Committee chair Frank Field questioned “whose side” the FCA were on, as he referenced the proposal to abandon the adviser presumption against transferring out of “gold-plated, stable, indexed pension schemes”. At the time, the Committee suggested the FCA should abandon the proposals, as it “looks reckless” in light of the BSPS case.

The FCA has however opened a discussion on charging structures for advising on pension transfers as it believes the existing starting assumption could be perceived as countering the incentive to give unsuitable advice created by a contingent charging model. In its consultation Improving the quality of pension transfer advice the regulator said it is considering whether a ban on contingent charging is necessary for pension transfer advice.

“While implementing a ban on contingent charging raises a number of issues such as access to advice, these need to be balanced against the potential benefits of a ban on contingent charging, i.e a reduction in unsuitable advice,” the consultation said.

In addition, as part of its additional guidance on suitability for DB transfers, the FCA has removed the guidance on wider circumstances. “Under COBS 9.211, it is the firm’s responsibility to obtain the necessary information about the client so that they can make a suitable recommendation,” it said.

Other factors that advisers should consider, as set out in COBS 9.2, include a client’s financial situation and investment objectives, as well as their knowledge and experience in the relevant investment field. It did not however, include guidance on the need to consider whether an existing workplace pension is a suitable destination for a transfer, as “advisers should already be doing this routinely as part of their assessment”.

“Our new guidance on assessing suitability makes clear that advisers should consider alternative ways of meeting the client’s objectives. This may include giving up only some safeguarded benefits so that a client can meet their income needs in retirement. We consider that our rules and guidance can be applied consistently to partial transfers, and that it is appropriate for an adviser to enquire if a scheme offers this option, as many schemes do not do so.

“If an adviser cannot get the necessary information to assess suitability, for example, income needs in retirement for a younger client, advisers must not make a personal recommendation under our suitability requirements (COBS 9.2.6R). In the final handbook text, we have made a consequential change to COBS 9.3.6G to signpost the additional suitability guidance when advising on pension transfers, conversions and opt-outs. Firms should be aware that not all of the requirements in COBS 19.1 apply to advice on giving up GARs. However, all of the suitability guidance (in COBS 19.1.6G) is relevant and should be considered as part of the advice process, including the starting assumption,” the FCA stated.

Commenting on the decision, Aegon pensions director Steven Cameron said demand for advice on DB transfers has never been higher and the FCA has now set out clearly ‘what good looks like’ allowing advisers to meet demands from their clients with confidence. “Following recent concerns, we’re pleased the FCA is looking in detail at contingent charging on DB transfers, and how potential conflicts can be addressed. This approach to charging does appeal to certain customer segments so an outright ban could widen the advice gap.”

In addition, Hargreaves Lansdown senior pension analyst Nathan Long said: “The regulator has announced that defined benefit transfers are for the few not the many, by keeping in place it’s assumption that they are generally not in people’s best interests. These types of pensions offer a valuable promise to provide income in retirement and do not expose members to the vagaries of the stock market or interest rate movements. Transfers to more modern defined contribution pensions can provide greater flexibility in retirement, but few people come to retirement with only a defined benefit pension and transfer values are not generally adequate compensation for leaving, meaning most people are best off staying put. This announcement is a positive for ensuring retirees are adequately protected.”

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