FCA Defined Benefit Pensions Transfer Concerns – How did we get here?.

By Mark Davies

Financial Services

Concerns about DB Transfers and the quality of Transfer advice became a widely publicised concern with the closure of the British Steel Pension Scheme (BSPS), in the wake of that British Steel’s takeover by Tata Steel. Pension freedoms were introduced in 2015, and since then it is believed that 390,000 people have withdrawn £60bn from defined benefit (DB) schemes. In recent years attractive transfer values have meant many members have left their relatively secure defined benefit pension plans to transfer to less certain defined contribution schemes.

Roughly 50% of DB Pensions withdrawals are transferred into personal pensions worrying the FCA. FCA’s 2018 market study showed the standard of Pensions Transfer advice to be considerably lower than the wider financial advice market, with Pensions Transfer advice suitable in fewer than 50% of cases, compared to 90% for the wider advice market. These concerns have led the FCA to undertake further work to determine the quality of Pensions Transfer advice and to tighten up the market. FCA’s stated ambition is to raise the standard of Pensions Transfer advice to the same standard as the wider market.

Suitability Concerns

FCA’s handbook asks advisers advising on Pensions Transfers to approach the advice assuming that a pension transfer is unlikely to be suitable (COBS 19.1.6G). The FCA handbook says “A firm should only consider a transfer, conversion or opt-out to be suitable if it can clearly demonstrate, on contemporary evidence, that the transfer, conversion or opt-out is in the retail client’s best interests.”

Starting from that point of view the FCA has stated that they find it surprising that 69% of the 234,951 clients were recommended to transfer. What is more concerning is that 1,454 firms of the total 2,426 firms providing transfer advice during this period (60%) had recommended 75% or more of their clients to transfer.

Not surprisingly FCA’s Business Plan promised a wide-ranging programme of investigation and supervision during 2019/20, a promise it has followed through on. The actions to date have included publishing:

  • Policy Statement 18/6 (effective October 2018) which set out revised rules and guidance to improve advice on DB pensions.
  • Its latest supervisory findings (December 2018), in which FCA stated that “Any firm that is active in this market can expect to be involved in our work in 2019. We will not hesitate to use our investigatory powers where we identify evidence of serious misconduct which could have caused harm to consumers.”
  • Consultation Paper 19/25 (July 2019), proposing a ban on contingent charging for DB advice.

What Next?

We are currently waiting for the FCA’s next review of the market and deeper look at the standards of current advice. But we can be absolutely certain that FCA’s focus on Transfers will continue and that firms need to be prepared.

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