The FCA has published a reflection based around its work on pension transfer advice over the past year, along with a summary of its key findings.
This year the FCA has collected information from 45 advisory firms and conducted further assessment work, including file reviews and visits, on 18 of these. Since April 2015, these 18 firms have advised 48,248 clients on their Defined Benefit (DB) pension schemes, which has resulted in 24,919 pension transfers. The FCA was disappointed to find that less than 50% of the advice it reviewed was suitable.
The big concern
At the highest level, the FCA is concerned that firms are not consistently providing suitable advice on pension transfers. After having reviewed the advice given by the previously mentioned 18 firms on 154 transfers, its suitability findings were as follows:
Suitable: 74 (48%)
Unsuitable: 45 (29%)
Unclear: 35 (23%)
Such suitability rates are significantly lower than those recorded in the FCA's 2017 Assessing Suitability Review, in which 91% of advice on pensions and investments was found to be suitable. The FCA states that it is unacceptable for pension transfer advice to be at such a low standard compared to that of investment.
The FCA also reviewed the adequacy of firms' disclosure and communications with clients, the findings from which were as follows:
Compliant: 45 (29%)
Non-compliant: 95 (62%)
Unclear: 14 (9%)
In the main, the disclosure of failings relate to the way in which advisory firms present their initial and ongoing fees.
List of failings
The list of failings discovered by the FCA within pension transfer advice included:
- obtaining only generic client objectives (such as 'flexibility' or 'increase pension'), without exploring what these mean to the client or considering whether the client is willing or able to take the risk required to achieve these objectives;
- failure to obtain necessary information regarding the client's income and expenditure prior to making a personal recommendation;
- failure to take into account longevity prospects beyond average life expectancy to inform an assessment of the sustainability of income;
- failure to assess or utilising flawed methods to assess the risk the client is willing to take in relation to their benefits. In particular, reliance on risk assessment tools which were not designed to assess the specific risks associated with transferring from a DB scheme;
- where transfer risk was assessed, the use of unbalanced language that was likely to steer clients to respond in a certain way.
Triage Services
The FCA found instances of firms stepping over the advice boundary when providing a triage service. It has reiterated that any guidance based on the consideration of a customer's circumstances which steers them one way or another, is likely to be advice on the merits of a transfer, and therefore pension transfer advice (and not triage).
Next steps
Reducing the potential for harm caused by unsuitable pension transfer advice continues to be a key priority for the FCA, with a wide-ranging programme of activity planned for 2019. Firms providing pension transfer advice should urgently review their processes to ensure they have considered the issues identified by the FCA, both in the web update and in PS18/6 and PS 18/20, if they haven't already done so. The FCA has stated that it is disappointed by the number of firms assessed that should have been aware of its concerns, but had not taken effective action to address the issues identified. The web update has a tone of urgency and warns that the FCA 'will not hesitate to take action against any firm that continues to present harm to consumers'. It seems clear that the FCA will consider this its final warning.