The FCA has just updated what good advice looks like..
It’s fair to say that the Financial Conduct Authority means no more Mr Nice Guy.
In a press release circulated last week, the regulator made very clear its frustrations with what it is seeing during its ongoing review work in the defined benefits market. Director of Supervision Megan Butler articulated this in the most blunt terms, stating that the FCA was willing to visit every firm active in the area and to close down firms if they were unable or unwilling to meet required standards. Reiterated again was the expected starting position that a recommendation to transfer should be considered unsuitable unless suitability can clearly be demonstrated based on contemporary evidence.
Worryingly, the statistics tell a different story. The results of an FCA data collection exercise show that of 234,951 scheme members that had received advice on transferring between April 2015 and September 2018, 162,047, or 69 per cent, had been recommended to transfer out.
Allowing for the 59,086 who opted against taking full advice at the triage stage, this means that 55% of clients who consulted an advisory firm ended up being advised to transfer out of their schemes. Whilst Ms Butler was quick to note that this does not mean that all of those recommendations were unsuitable, it does indicate a significant risk of a higher than acceptable level of unsuitable advice.
More worryingly, of the 2,426 firms had provided advice on transferring their DB pension, 1,454 had recommended 75 per cent or more of their clients to transfer. Some of those figures are deeply concerning, the more so given that triage is not compulsory and not every firm will be filtering clients in this manner.
It is worth reiterating as we have said in previous blogs that the key driver of suitability needs to be the client’s objectives. These need to be specific, measurable and personalised. Given the starting position of the FCA, the file needs to demonstrate that the client has a specific and individual objective that cannot be met using the defined benefit entitlement. If this is not the case, the regulator is legitimately entitled to ask the question as to where the benefit is to the client in transferring the risk from the employer to them.
I read a very interesting article in Personal Finance Professional, the PFS quarterly magazine, this month by the excellent Rory Percival. In this, Mr Percival raised the suggestion that some firms were taking an overly scientific approach to the art of financial planning. Essentially, that defined benefit transfer work was becoming reduced to a series of cashflow models, critical yield comparisons and sustainable withdrawal rates at the expense of soft facts. It needs to be remembered that client views on things such as risk and experience are key here and if the client is not comfortable with the risks then a transfer is not likely to be suitable, regardless of what the predicted (key word) cashflows state.
By way of comparison, a recent case involved a client who was about to turn 61 and in moderate health. He was on a short term break from work and wished to return in a less stressful and less well paid role until retiring in full somewhere between 65 and 70, with his state pension due at 66. The client was looking to take a pension commencement lump sum of c £150,000 in order to repay his mortgage and a small number of other unsecured debts to reduce his outgoings, take a ‘holiday of a lifetime’ and purchase a second property. This could not be achieved using his existing scheme, which offered only c £75,000.
In his own words, he wished to enjoy his retirement whilst he was young enough and in good enough health to do so. Leaving death benefits to his family was a ‘nice to have’, given his health concerns and the fact that he and his partner were unmarried and his children were non-dependent. He had a genuine need for flexibility given the changes in his income expected over the next few years and had minimal other funds available to draw from. Part of his PCLS was to be retained in cash to ensure that he build an instant access ‘emergency fund’. This is the sort of situation where personalised objectives are present which, other factors permitting, may support a decision to transfer.
By contrast, we have seen other cases recently where objectives included ‘to review the ongoing suitability of your defined benefit arrangements’, ‘to achieve flexibility in your retirement planning’ and ‘death benefits’. Generic statements such as this are not likely to be considered sufficient, particularly where the client has significant existing defined contribution pensions which could provide flexibility and/or there is no clearly stated reason for requiring this.
Some of the cases we saw stated that the client required ‘flexibility’, however cashflow modelling indicated a consistent level of expenditure from retirement until death, allowing only for inflationary increases. Others used a potential higher PCLS as justification, but failed to document any particular lump sum needs. This sort of case cannot demonstrate a need to transfer out and is therefore likely to be considered unsuitable.
Another worrying statistic shows that of the clients advised to remain in their schemes, 13% were processed as ‘insistent client’ transfers. The view of the PFS is that professional advisers should not facilitate a transfer against their own advice, as by doing so they are helping to arrange an unsuitable solution. The PFS has indicated a concern relating to how FOS may view this in future years. Given the lack of clarity surrounding this issue, there is a distinct possibility that short term gain may result in a significant amount of long term pain.
Already, I am aware that the FCA is recruiting for a relatively long-term piece of work reviewing historic transfers for ‘in scope firms’. Those with a particularly high proportion of transfers to remain cases and/ or a high number off transfers relative to the number of pension transfer specialists can be expected to be at the front of the queue. All the signs are that the regulator is ready to crack the whip on this.
You have been warned……no more.
And we will be dissecting this further in the coming weeks….watch out for more guidance and support from EPC.
We live in interesting times.