Consultation Paper 18/7
The FCA have issued a consultation paper with proposals to improve the quality of pension transfer advice. This is a summary of the proposals included within CP 18/7.
Consultation Paper 18/7
The FCA published Consultation Paper 17/16 in June last year and have now published Policy Statement 18/6 relating to some of the points raised. There have also rolled over some of the other points for further consultation. Consultation Paper 18/7 was published on the 27th March 2018 and includes proposals aiming to improve the pension transfer advice provided to customers.
The paper is open for responses until the 25th May 2018 with a policy statement planned to be issued no later than Autumn 2018. Responses can be completed online at https://www.fca.org.uk/cp18-07-response-form
I have summarised the main points below and the full consultation paper is available to view here.
PTS Role and Qualifications
Currently a PTS is only required to check a pension transfer case to sign off on the suitability of the transfer recommendation. The FCA have made a few proposals which they feel will increase the suitability of recommendations made to customers (after conducting a review of DB to DC transfer cases the FCA found that only 47% of these could be shown to be suitable).
At the present time a PTS doesn’t need to be qualified to provide investment advice. This has resulted in cases where the PTS has only provided advice on the suitability of the transfer and left the scheme and investment recommendation to another adviser. The FCA believe this needs to change and while they remain comfortable with the advice model allowing different aspects of the advice being dealt with by more than one adviser, they do not see how a PTS can determine a transfer is suitable without having the ability to analyse the destination of the funds. They have proposed that all PTSs must hold the level 4 RDR qualification for advising on investments.
Many advisers already hold this qualification but for those who are not authorised to provide investment advice, “gap-fill” will be an option to meet the requirement. On the face of it this doesn’t represent a significant hurdle for those advisers in a PTS role. The proposed deadline for attaining the qualification is October 2020 and no PTS will be able to continue advising on pension transfers beyond this point without it.
There is also a proposal to update the qualification required to be able to operate as a PTS. The rationale for this is to bring the exam up to date to include changes in the pensions landscape following pensions freedom. There is no requirement for existing qualified PTSs to re-sit the new exam but firms will be responsible for making sure advisers have the relevant knowledge to carry out their role in line with the FCA Training and Competence Sourcebook.
There are a number of proposed changes and improvements to the advice process relating to the following areas.
Definition of a Pension Transfer
Advisers working together
Advising “self investors”
The triage process
Clients’ attitude to risk
Requirement for issuing a Suitability Report
Pension Increase Assumptions
Pension Transfer Definition
It has been highlighted that the current definition of a pension transfer also includes the movement of some occupational schemes that do not include safeguarded benefits. It is felt that this is unnecessary and the proposal is to amend the definition so that it will only apply where the scheme includes a safeguarded benefit.
Advisers working together
CP 18/7 considers the use of different advice models and more specifically where a PTS provides advice on the suitability of a transfer from the existing scheme and another adviser provides investment advice for the transfer destination. They acknowledge that in certain circumstances this model could actually provide a better customer outcome but plan to produce further guidance to clarify their expectations of the parties involved.
The intention seems to be to encourage both advisers to work more closely and to take into account all the information and risks relating to the potential transfer rather than focussing on only one part of the recommendation. They have also said that in cases where the PTS has not spoken to the client and requires further information they should either contact the adviser who has spoken to the client or contact the client directly.
Advising “Self Investors”
The FCA have said that they do not have an issue with an adviser giving pension transfer advice to individuals who do not require advice on the destination of the transferred funds. They say that the same guidance applies to advising self investors as with other cases and that the PTS should have due regard to the destination scheme and investments when making their recommendation. Where the adviser believes that a transfer is the correct outcome but does not believe the investors proposed scheme and/or investments are suitable they need to make it clear in their report that the transfer could be suitable if the destination was different. If the adviser then goes on to make a recommendation on the destination scheme or investments they will be deemed to be providing investment advice.
Attitude to Risk
The FCA are proposing issuing further guidance on clients’ attitude to risk as they feel there is an over-reliance on computer based ATRQs which focus mainly on a client’s attitude to risk for investment. They have said there needs to be more discussion about the client’s attitude to risk regarding losing safeguarded benefits. They have also highlighted that care needs to be taken regarding the language used in questioning as this can be biased in favour of a transfer. The example given in the paper is where the questioning only relates to a client’s attitude to flexibility and control over their pension pot. Who doesn’t want flexibility and control?
Interestingly there is no reference to a client’s capacity for loss in the paper which is surely at least as important as their ATR? A client may be psychologically comfortable investing their entire transfer value in equities and giving up a guaranteed, index linked scheme pension, but if their personal financial circumstances restrict their ability to do this then surely a transfer is unsuitable?
The Triage Process
Although not a mandatory requirement approximately half of firms use some kind of triage service when dealing with clients and CP 18/7 raises concerns about the way some of these services are used. After reviewing the services provided, the FCA believe in some instances regulated advice has been given during the triage and confirm this is not acceptable. One example given in the paper is a client being told it is unlikely to be in their best interests to transfer if they were to proceed with regulated advice.
The FCA view is that the triage should be restricted to generic, factual information about the advantages and disadvantages of transferring and at no point take into account the client’s personal circumstances. The proposal is to update PERG with new guidance to clarify how this service should be provided.
Suitability Report for all Cases
There is a proposal that the recommendation as to whether a transfer is suitable should be provided in the form of a suitability report regardless of whether the advice is to transfer or not. The view being that advice not to transfer still has the same value as a recommendation to transfer and should be recorded as such.
The FCA say that “While we recognise that there may be a modest increase in charges for some consumers, depending on the charging model, we consider it is important for consumers to receive a suitability report that summarises the issues, regardless of the conclusion”. It is acknowledged later in the report however that many consumers “do not see the merits of advice”. It will be interesting to see how consumers react to paying a “modest” increase in charges for advice to do nothing.
Pension Increase Assumptions
Assumptions about increases to the scheme benefits are required for the TVC and when preparing an APTA. CP17/16 sought views on the following:
- The relative level of the Retail Price Index (RPI) and Consumer Prices Index (CPI) assumptions used to project future benefits (in the TVC) between the date of the employee leaving the scheme and the date on which the benefits commence.
- The level of the current assumption for certain limited pension increases offered by the ceding scheme. The assumption is needed for the TVC when determining the cost of replicating the ceding scheme benefits in a DC environment. These are pension increases that grow in line with an inflation index, such as the RPI or CPI, but also have both upper and/or lower limits (caps and collars).
After feedback the proposal is that advisers should use fixed rates in certain circumstances. Where the collar is above the relevant RPI/CPI rate the collar should be used. Where the cap is below RPI/CPI, the cap should be used. For all other cases the increase should be the relevant RPI/CPI rate.
What’s next for contingent charging?
The Work and Pensions Select Committee report following the inquiry into on the British Steel DB transfers called for a ban on contingent charging on pension transfer advice. It is therefore not surprising that the most contentious points raised in CP 18/7 relate to the potential “consumer harm” caused by contingent charging models.
The FCA state in CP18/7 that for pension transfer advice using a pure contingent transfer model (no transfer no fee) has the “greatest potential to incentivise unsuitable advice”. This is the view also held by the Financial Ombudsman Service and professional indemnity insurers.
The FCA allows currently allows contingent charging for pension transfer and other types of advice but they highlight transfer advice as being different to other types of advice e.g. recommending a stocks and shares ISA. They have suggested that pension transfer advice differs due to a number of factors:
- in most cases, unlike investment advice, the right outcome will be for the customer not to take any action (i.e. not to transfer)
- most pension transfer advice is mandatory, rather than sought voluntarily
- it involves an irreversible decision to give up a valuable benefit
- as a result, it often involves consumers with little financial expertise, rather than those actively seeking to engage with the investment and advice process
- the potential for longer-term harm is particularly great,
The FCA say that the alternative to contingent charging is that all clients are charged the same amount regardless of whether they transfer or not. In order to achieve this they have considered whether to ban contingent charging on the pension transfer advice, and/or the investment advice. They have concerns about a ban on contingent charging being “gamed” by advisers to essentially allow them to continue charging in the same way and have asked for feedback on how this could be avoided. They have made a couple of suggestions which they feel could be mitigate the risk of this happening.
- An effective triage service (providing generic and factual information only) could reduce the number of clients who choose to seek advice on whether to transfer and therefore incur advice charges.
- Equalising the charges for the transfer and investment advice to reduce the monetary incentive to recommend a transfer as the outcome.
The paper acknowledges that a ban on contingent charging could reduce the access clients have to advice which is a concern raised by others in the industry. They have also said that this needs to be balanced with the potential reduction in unsuitable cases a ban could result in.
Although the FCA have said “gap fill” can be used to upskill existing Pension Transfer Specialists they have estimated that of the 5,000 PTSs advising, approximately half will need to complete further exams. Depending on how much study is required this could result in some advisers leaving the industry, which could further reduce access to appropriate advice.
CP18/7 proposes some significant changes in how pension transfer advice will be provided to clients and many firms’ current processes will need to change. It is difficult to see though how firms’ can put in place new processes without also knowing how they are going to be able to charge for each stage of the advice journey.
Contingent charging has become an area of heavy debate and CP18/7 doesn’t provide clear evidence that contingent charging is to blame for unsuitable advice. If a recommendation is suitable then the method of charging should not be an issue? The FCA themselves state in CP 18/7.
“We acknowledge that the causal link between contingent charging and unsuitable advice is not clear-cut. It is generally hard to show that unsuitable advice is due to firms using contingent charging models.”
“There is an argument that despite the unmanaged conflicts of interest charges are not the root cause of poor advice. Consequently it is possible that additional regulation addressing the conflicts of interest associated with contingent charging may not be effective in reducing the proportions of unsuitable advice”
Charging for advice is a complex issue but from CP18/7 it is still not clear what the future holds.
Policy Statement 18/6 (PS18/6)
A summary of PS18/6
ARTICLE by The Technical Team
Pension transfers and conversions
We explore the advantages and disadvantages of transferring a DB scheme to a DC type scheme and the assessment process, including Transfer Value Analysis Systems (TVAs).
ARTICLE by The Technical Team
Transferring a pension scheme
Learn about what’s allowed and what’s not allowed by HMRC when a member of a pension scheme transfers their accrued pension rights from one scheme to another.