FCAs next steps to improve the defined benefit pension transfer market (5 June 2020)
The FCA set out further steps in their drive to improve the defined benefit transfer advice market on 5 June 2020.
They issued five items. A supervision update, an advice checker, a guidance consultation, a policy statement and some information for consumers considering a transfer.
At over 240 pages of reading I’ve pulled out some of the key points below.
Suitability has been rising to around 60% but still 17% unsuitable. The balance are cases where there are, a new phrase to me, material information gaps.
30 enforcement actions are ongoing.
Firms must have adequate PI cover and 745 firms have amended their permissions due to this with 55 leaving the market altogether. They have stated they will act over any firms who try to reduce resources or restructure to avoid any liabilities.
FCA will be engaging with firms they have reviewed to ensure they have put any wrongs right including past business reviews and redress where necessary.
The FCA will be writing to all 7700 British Steel members who transferred out and help them revisit the advice they received and complain where necessary.
There will be ongoing supervision and a further data request.
FCA have published an advice checker so consumers can work out if they might have been misadvised. Specifically targeting those receiving regulated advice since April 2015.
The commentary reflects the suitability shortcomings. The areas can be broadly categorised as:
- inadequate fact-finding information,
- lack of focus on how the DB scheme could meet retirement needs,
- no checking of understanding of risks and benefits on DB and DC schemes
- investments – higher charges, unusual and downside analysis
- focussing on one or more of the benefits e.g. flexibility, higher death benefits
Advisers should probably familiarise themselves with the page in question in case of customer approach or to satisfy themselves they have done an appropriate job.
I foresee template complaint letters springing up like we saw with endowment claims.
The FCA did make the point that the complaints process is free and can be followed by clients without the need for them to engage with a claims management company.
This has been a bit unusual as the FCA have gone to greater lengths than I can recall in helping advisers understand “what good looks like”.
This was in response to widespread requests for more detail around what is and isn’t good practice in delivering DB advice.
It concentrates on the process and procedures that should be in place to deliver consistently good outcomes.
You could say the policy statement is the technical facts of what is required and the guidance consultation is “now you know what you have to do, this is our idea of how you should be doing it”.
The policy statement was 149 pages and is the technical data around what you must do, as opposed to how you should do it that was covered in the guidance consultation.
Most provisions apply from 1st October, a four month lead in instead of the six months outlined in the consultation.
Some of the key points:
As expected, with limited exceptions the ban on contingent charging is going ahead albeit there has been no causal link proving either way on whether it contributes to poor outcomes.
The ban applies from 1st October but where the process started prior to 1 Oct 2020 you can still charge contingently if the personal recommendation is made prior to 1st January 20210.
In practice, for many non-contingent charging is effectively here. With some schemes taking at least three months to provide just the CETV (not including any current COVID delays), chasing for any missing or further information, and then the analysis and preparation prior to presentation to the client, the ability to get a personal recommendation issued by 1st January could be severely constrained.
Carve outs from ban
Eligibility has been tightened but the requirement has been relaxed.
Limited life expectancy should still be driven by a medical condition not lifestyle e.g. you can’t put a heavy overweight smoker in the carve out for those reasons alone.
There is no need for confirmation from a doctor that life expectancy is prior to 75. But more onus on the adviser.
Sufficiently robust evidence should be gathered e.g. medical reports or information from suitably reputable independent source, to prove that life expectancy is pre 75. It is a point of time decision so medical advances do not need to be considered.
The carve out can only be used for those without the ability to pay for the advice themselves e.g. from other assets.
Serious financial difficulty
More guidance has been issued around assessing where this carve out applies.
Eligibility will be based on MaPS definition of over-indebtedness, which has 2 parts:
- keeping up with domestic bills and credit commitments is a heavy burden, and
- payments for any credit commitments and/or any domestic bills have been missed in any 3 or more of the last 6 months
There is an expectation that there will be no non-essential expenditure being incurred. Likewise, savings available to pay off debts.
If a consumer would immediately meet this test if they had to pay for advice on a non-contingent basis, then the FCA consider they can be treated as meeting the test. And, obviously, only available to those who can access pension after transfer.
Eligibility for either carve out does not indicate that a transfer would ultimately be suitable as this will always be on a client specific basis based on their circumstances.
Will be going ahead as planned. The only decisions available are either not to transfer or it is unclear whether transfer should be undertaken or not.
One clarification made is that it is possible to consider ceding scheme information e.g. expected pension amount
There can be no APTA or TVC or taking into account any potential receiving scheme. If there is it is full advice and must be charged accordingly.
Attitude to transfer risk analysis is effectively required with abridged advice.
Firms must consider the overall costs of advice to the client with full advice and consider whether it would be more appropriate to offer abridged advice. Clearly, if the client proceeds to full advice they should not be charged again for the work already conducted.
There can be no abridged advice prior to 1st October.
The ability to take into account ceding scheme is welcome and some would say necessary. It is unclear whether any rudimentary cash flow modelling would be allowable within the abridged advice process.
Discounting the WPS
This was in part down to the FCA’s desire to reduce ongoing charges including advice charges.
FCA consider OAC not worth it for most people whose circumstances don't change from year to year (assuming they are in a WPS default). Big statement. And a little contradictory when considering previous thematic reviews and Mifid ongoing suitability requirements.
If ongoing advice is considered necessary, it must be included in the recommendation and consideration given to charging directly. So potentially advise to go to WPS and have a "pay for ongoing advice from bank" arrangement.
At outset advisers need to assume a PP would not be as suitable as a WPS default arrangement and demonstrate clearly the PP is more suitable.
If there are multiple WPS then they consider most recent but can (should?) take into account others. Things are silent if there are multiple employments with multiple WPS.
Restricted firms / VIFs who have issues recommending “off panel” will:
- need to withdraw from DB advice,
- start to make off panel recommendations, or
- only advise those with no WPS default available
This rule applies from 1st October but where the process started before then there is a 3 months transition.
1 page summary
This will be required and applies to advice that requires a PTS from 1st October.
There are some changes of note:
- the charges as percentage of DB income requirement has been removed which is good as was slightly misleading / not useful overall.
- language has been changed from “stay in scheme” to keep my current guaranteed benefits
- current guaranteed benefits should be discounted back form NRD using standard CPI assumption
- extra detail added around additional charges
You can see examples in Annex 2 of the policy statement.
The WPS comparison can be omitted if advice started advice prior to 1st October.
It is thought most advisers perform an understanding check as standard for all advice but the key, as is usual, is proof and ensuring the records are kept.
There is a good section on the understanding check in the guidance consultation.
This was meant to apply from one week after the paper but has been aligned to 1st October along with most other things.
The PTS CPD changes are going ahead but with some variation and clarification. Nine of the fifteen hours of additional CPD required must be structured, same ratio as non PTS CPD, and 5 hours must still be delivered by an independent external trainer.
The CPD year can start any time from 1st October and must start within 12 months. This means the PTS CPD year can be aligned to the non PTS CPD year.
There is some useful information in the guidance consultation on the types of activities that should be covered in PTS CPD.
This is going ahead as expected but it has not been mandated. I expect everyone sees it as good and almost standard practice now anyway.
There were two key points on modelling.
Modelling should be done in real terms. The standard CPI assumption has been specified.
The other was sufficiently robust stress testing had to be carried out. The FCA have not specified what these should be as they will be particular to the individual case circumstances.
There is a reminder that various taxes such as income tax and lifetime allowance tax, where appropriate, should be taken into account on a reasonable basis e.g. assuming personal allowance and tax bands increase.
New rules apply from 1st October, but a three month window allowed if evidence advice started prior to 1st October.
There are many other areas including in the policy statement. They are going ahead largely as expected. These include including dealing with estimated values, slightly changed information requirements (PI / RMAR etc) and technical changes covering retirement annuities and the transfer value comparator amongst other things.
There is a lot to take in for the next steps. Getting to know what you need to do technically, checking how your current processes and procedures on advice delivery stack up against what the FCA believes good practice is and, probably, checking your advice against what the FCA think are grounds for complaint in the advice checker.
Plans are hopefully well progressed and just needing a tweak. 1st October isn’t far away!
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