Right across the retail financial services industry, firms are busy getting ready for the FCA’s New Consumer Duty, one of the biggest regulatory changes in recent years.
The implications differ by sector, type and size of firm, but can also differ between the services a firm offers. One specific service which warrants special consideration is advice on transferring defined benefit (DB) or safeguarded rights.
There is little specific reference to DB transfer advice in the rules and guidance but past issues in this market were one reason why the FCA concluded it needed to change its approach to regulation. Here are the areas where I think the new Duty might have specific implications for DB transfer advice.
Cross-cutting rules
Acting in good faith
Unfortunately, historically some firms offering DB transfer advice did not always act in good faith. There have been instances of failing to address information asymmetries.
Some clients may have been blinded by the prospect of a lottery-win size lump sum which might look huge compared to a guaranteed modest income for an often under-estimated lifespan. And there were also concerns over whether contingent charging led to a remuneration bias which favoured recommending transferring.
Avoid causing foreseeable harm
This has particular significance for DB transfer advice as advisers must start from the assumption that transferring is not in the member’s interest, or, put another way, is likely to cause foreseeable harm.
When the FCA is considering proportionality, and what’s ‘acting reasonably’, it will look at the nature of the service
However, both transferring and staying put could create different forms of foreseeable harm and much depends on balancing such risks with upside benefits at individual client level. For example, there are complex considerations around death benefits, IHT and lifetime allowance charges versus flexibility.
Supporting clients meet their financial objectives
In DB transfer advice there’s a heightened emphasis on being clear on an individual’s financial wishes and needs, and on exploring if there are other ways of meeting objectives without transferring. The FCA has also made it clear that general objectives such as ‘flexible income’ or ‘enhanced death benefits’ are insufficient justification to recommend transferring.
Proportionality and ‘acting reasonably’
When the FCA is considering proportionality, and what’s ‘acting reasonably’, it will look at the nature of the service, the characteristics of the customer and the firm’s role. I expect DB transfer advice will be towards the top end of the spectrum.
By the very nature of the service, inappropriate DB transfer advice has a high risk of harm. It’s particularly complex for consumers to understand. And for valid reasons such as Professional Indemnity Insurance, the costs are high.
Advisers must start from the assumption that transferring is not in the member’s interest, or, put another way, is likely to cause foreseeable harm
In terms of client characteristics, unlike in other advice scenarios, individuals are often seeking advice as a necessary route to accessing a life changing lump sum. They may have little other financial resources and their financial capability may be low, as was referenced in the British Steel case.
Employees of some employers may also have particular vulnerabilities for example if there have been redundancies or again like British Steel, time pressure.
The firm’s role is to offer highly specialised advice. Whether or not to transfer is a long term, irrevocable decision which will materially influence the financial future of the individual. Of course, not transferring when it would be the right thing to do can also create material detriment, which is one reason it’s so important clients can still access advice here.
I expect the FCA will also look for particularly robust evidence and MI in reflection of the complexity and significance of DB transfer advice and the significant risk of poor outcomes.
The outcomes
Products and services
While there’s no ‘right and wrong’, it may be helpful to split the advice service into two elements – the transfer advice and the subsequent product recommendation.
Like all adviser services, I’d recommend reviewing not just the design but also how the service is articulated, as this may influence responsibilities under the Duty. This includes abridged advice and under ‘price and value’ how you charge for this.
Existing regulations on DB transfer advice include additional prescription around disclosures and communications
Target markets should also be revisited – is this defined by size of transfer or by employees of particular employers? Proactively seeking to identify and adapt for vulnerabilities such as those I mentioned earlier is also important.
The new Duty sets expectations where more than one firm is involved, including to document in writing who’s responsible for what, which may be particularly relevant for DB transfer advice.
Regarding the product recommendation, do product providers specify customers with DB transfers within their target market? There’s a question over how the new Duty interfaces with the requirement to consider an available workplace pension ahead of a SIPP. Unless serviced by FCA regulated firms, trust-based workplace pensions are outside the scope of the new Duty so won’t provide target markets or the outcomes of value assessments.
Price and value
Here too, it may be helpful to consider the transfer advice and the product recommendation separately. The requirement is to look at the overall price the customer will pay over the duration of the service compared to the likely benefits.
I’d recommend reviewing not just the design but also how the service is articulated
Of course, there is a ‘remain or transfer’ fork in the road here with very different charges, outcomes and values under each. The FCA’s concerns over fairness of flat % charges should be considered when transfer values can vary dramatically between clients.
Consumer understanding
Existing regulations on DB transfer advice include additional prescription around disclosures and communications. The one-page summary at the front of suitability reports is in line with suggestions in the new Duty to use layering and bring key information upfront. The explicit requirement for clients to sign to confirm they’ve understood DB transfer advice is already one step ahead of the new Duty’s broader ‘understanding’ test.
Consumer support
Implications here will vary depending on whether ongoing advice is being provided, with the FCA having previously challenged if always needed, particularly when transferring into a workplace pension.
Conclusion
Advisers operating in the DB transfer market are already subject to particularly high standards of regulatory scrutiny, so it should come as no surprise that the new Duty will also come with high expectations. But any firm considering exiting this market should bear in mind the FCA flags that withdrawing a product or service could lead to foreseeable harm for clients. This may be addressed through a referral mechanism to a specialist firm.
I’m a big fan of the 39 questions the FCA may ask firms and suggests firms should ask themselves, some of which might be particularly relevant to DB transfer advice.
The FCA will be offering further sector specific guidance in the coming months, and while I don’t anticipate a guide specific to DB transfer advice, I’ll be keeping an eye out for any further insights into this important and specialist sector of the market.
Steven Cameron is pensions director at Aegon UK
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