On 5 June, the FCA published Policy Statement 20/6 outlining its plans to improve the DB transfer market, including among other things, banning contingent charging in all but a few circumstances and introducing an abridged advice process. The Statement highlights the feedback received from consultation CP19/25, and details the FCA’s final rules and guidance.
The FCA has decided to introduce these new measures because, based on its interventions, it considers that the risk of harm from unsuitable advice remains unacceptably high. This Policy Statement and the accompanying Guidance Consultation aim to:
- improve the quality of future advice on DB transfers
- reduce the incidence of bad advice, and
- reduce the harm to consumers losing their guaranteed lifetime pension income and paying high fees when doing so.
The FCA also hopes that by reducing the incidence of bad advice, and the high redress and insurance costs that this leads to, it will make the pension transfer market more sustainable in the longer term.
The majority of the changes will come into effect from 1 October 2020, with some effective from 15 June 2020.
Ban on contingent charging
In order to reduce the scope for conflicts of interest to influence transfer advice, the FCA has confirmed that it plans to introduce a ban on contingent charging. This will come into effect from 1 October 2020. The ban will apply generally except for two scenarios where it may be in an individual’s interest to transfer and where the need to pay charges up front may prevent them from accessing advice.
From 1 October, firms will need to charge the same amount for advice whether or not they recommend a transfer. However, a firm may set a different level of non-contingent charges if they are not undertaking the full range of advising and related services that are normally provided alongside DB transfer advice. Firms with clients who have agreed contingent charges before 1 October and started work before that date may charge contingently, providing a personal recommendation is given before 1 January 2021.
The two carve-outs will apply where a consumer can demonstrate that they are:
- suffering from serious ill health – consumers would need to provide evidence that they have a life limiting condition that is likely to mean that their life expectancy is lower than age 75.
- experiencing serious financial hardship – the FCA have set out circumstances where the test is likely to be met and not met but the guidance is not prescriptive and not exhaustive. Firms will not be expected to revisit whether a consumer continues to meet the tests for the carve-out after they have given advice.
In response to criticism regarding the ban on contingent charging, the FCA will introduce a new short form of advice, ‘abridged advice’ to help customers access advice at a more affordable cost. Advisers will be able to give abridged advice only if the result is:
- a personal recommendation to the client not to transfer or convert their pension, or
- to inform the consumer that it is unclear whether they would benefit from a pension transfer or conversion based on the information collected. The adviser must then check if the consumer wants to continue to obtain and pay for full advice and that they understand the associated costs.
Abridged advice should include a full fact-find and risk assessment, carried out or checked by a pension transfer specialist and must provide a suitability report for advice not to transfer. Firms can collect further information on the benefits of the client’s existing scheme without compromising the role of abridged advice. Firms should not give abridged advice before 1 October 2020.
Other key points
Other key points covered in the policy statement include:
- The statement includes new and updated guidance for firms delivering triage services that provides greater clarity on how firms can avoid giving advice in these instances. The guidance becomes effective from 15 June 2020.
- Advisers will be required to prioritise a DC workplace pension scheme as the destination for a DB transfer and demonstrate why any alternative is more suitable. This will come into effect from 1 October 2020 and it is designed to reduce the incidence of advisers recommending their own firm’s pension products which introduces inevitable conflicts of interest as the firm stands to benefit from the ongoing charges associated with that product following the transfer. Transitional rules will apply where a suitability report is prepared within 3 months of the new requirement coming into force.
- A letter of engagement must be sent to consumers that sets out in monetary terms the amounts the consumer would pay for abridged advice and full advice and any subsequent ongoing advice, with effect from 1 October 2020.
- A 1-page summary must be included at the front of all transfer suitability reports requiring a pension transfer specialist from 1 October 2020.
- Firms will be required to provide evidence that the client can demonstrate they understand the risks to them of proceeding with a pension transfer or conversion before finalising the recommendation and keep a record of this. The rule and guidance will be effective from 1 October 2020.
- Pension transfer specialists will need to undertake a minimum of 15 hours CPD each year focused on pension transfer advice, in addition to any other CPD they undertake. The original date of implementation for the new CPD rules was 1 January 2021. However, this has been brought forward to 1 October 2020, in line with the other new rules.
- A new section of the RMAR regulatory return covering data on DB and other safeguarded benefit advice will be introduced to enable the FCA to supervise DB transfer advice more effectively. The first 6-month reporting period will start on 1 October 2020. Firms must make their first submission by the end of April 2021.
- The FCA plans to amend the data it collects on intermediaries PII cover to enable it to more effectively monitor this. Guidance notes are included to help firms with this.
- Various technical amendments have been made to the FCA’s rules and guidance including a new pension transfer definition, clarification on how firms should apply the Transfer Value Comparator methodology in practice, changes to cash flow modelling, amending definition of Guaranteed Annuity Rate, new guidance for firms advising a client with an estimated transfer value in cases when ceding scheme arrangements are expected to be changed or replace by another scheme, amendments to parts of the adviser charging and inducement rules and changes to provisions relating to arranging transfers. The new guidance relating to transfer values will be effective from 15 June 2020.
Alongside the Policy Statement, the FCA has issued new non-Handbook guidance for consultation on which is designed to help advisers understand
its expectations when advising on pension transfers and conversions. It focuses particularly on the processes firms need to put in place to give suitable DB transfer advice – and avoid giving unsuitable advice.
The aim of the guidance is to improve the suitability of DB transfer advice and the outcomes for individual consumers. It also aims to give advisers the confidence to give good advice, so that they and their professional indemnity insurers can see the benefits of less unsuitable advice, making the pension advice market more sustainable going forward.
The guidance identifies good and poor practice and is designed to help firms identify weaknesses in their existing advice processes. The deadline for responding to the consultation is 4 September 2020.
The FCA has said it will then consider the feedback and aim to publish Finalised Guidance in the first quarter of 2021.
Ongoing supervisory work
The FCA has also issued a further update to its ongoing targeted supervisory work in relation to DB transfer advice. Through this work, the FCA has identified material information gaps and is concerned that many firms are failing to collect the information necessary to provide suitable advice in particular:
- the client’s anticipated income and expenditure in retirement and how this may fluctuate, and
- the client’s objectives and the role their pensions play in meeting those objectives.
In addition, the FCA expects all firms providing DB transfer advice to have appropriate Professional Indemnity Insurance cover in place. Of the 745 firms who amended their permission because of the FCA’s interventions, 55 stopped and withdrew from the market after the FCA identified they did not have adequate PII.
Finally, the FCA carried out a detailed review of 55 firms and whilst there had been some improvement in the quality of advice over time, the level is still below the FCA’s objective for the market and the FCA is currently undertaking 30 enforcement investigations in light of its findings.
The FCA also reviewed 192 instances of advice to former BSPS members. Of these, 40 (21%) appear to be suitable, 91 (47%) appear to be unsuitable and 61 (32%) appear to have material information gaps.
Having put these measures on hold at the outset of the Covid crisis, it is good that the FCA has decided to press ahead with these changes to try to improve the quality of DB transfer advice. This is particularly important given that we are still in a time of great economic uncertainty, which may prompt more individual than normal to consider “cashing in” their DB pensions. However, the delay in implementing these measures means that advisers may still be subject to conflicts of interest when giving advice in the coming months and, even after these new measures have come into force, individuals will still need assistance to access good quality advice when making what may be the most significant financial decision of their lives.