Poor quality of advice in respect of defined benefit pensions made the headlines last year following a raft of issues associated with members of the British Steel Pension Scheme.
Newly published rules from the Financial Conduct Authority (FCA) are designed to improve the quality of pension transfer advice. The rules follow a consultation and are aimed at improving the advice people receive when they consider transferring their defined benefits. In a policy statement, the FCA confirmed it is taking forward most of its earlier proposals from March 2018. These proposals mainly related to transfers from defined benefit pension schemes to defined contribution or personal pension schemes. This consultation proposed further changes to regulatory rules and guidance on advising on transferring from safeguarded benefit schemes. Safeguarded benefits arise where there is some form of guarantee or promise about the rate of secure pension income that the member will receive, or will have an option to receive.
As a result of the new FCA rules, all pension transfer specialist advisers will need to hold a specific investment advice qualification. This requirement doesn’t come into force until October 2020. It’s important for pension transfer specialists to hold specialist investment qualifications too, so they are able to identify whether a proposed pension scheme and investment solution is consistent with the needs and objectives of their clients. One common feature in poor quality pension transfer advice in the past has been a disconnect between the advice given about the pension benefits and then subsequent advice relating to investment decisions.
The FCA also expects in the new rules for advisers to consider their client’s attitude to, and understanding of, the risks of giving up safeguarded benefits for flexible benefits. According to the FCA, these new rules should improve the advice that people get when considering transferring their pension, including as a result of the pension freedoms.
One aspect of the consultation was considering whether the regulator should intervene when it comes to charging structures. A particularly contentious charging structure when it comes to defined benefit pension transfer advice is known as contingent charging. This means the adviser only gets paid a fee when they recommend a transfer from a defined benefit pension scheme to a personal pension. As a result of this contingent charging fee structure, impartiality is potentially compromised, as there is a strong financial incentive for the financial adviser to recommend the transfer goes ahead, regardless of suitability.
The FCA concluded that contingent charging is a complex area and the responses to its consultation confirm its initial analysis that the evidence it has seen does not show that contingent charging is the main driver of poor outcomes for customers. The FCA says that its supervisory work to date has also identified a number of other causes of poor advice, and it will carry out further work on the quality of advice. This isn’t the outcome on contingent charging many were hoping to hear. Rt Hon Frank Field MP, Chair of the Work and Pension Select Committee, said:
“Pensioners were swindled out of their savings yesterday, are being swindled out of those funds today, and still will be tomorrow. Yet the FCA fails to take effective action.
“Having seen the fate that befell British Steel pensioners, the Committee called on the FCA to take urgent action to ban contingent charging. Instead, the FCA has buried this in the long grass, even as unscrupulous advisers are circling like vultures around consumers.
“It’s time the FCA took decisive action to prevent another mis-selling scandal.”
Another part of the FCA’s consultation asked about the impact on access to advice due to restrictions on charging models. One negative consequence of any ban on contingent charging could be to limit access to advice, for people who cannot afford to pay a fee for advice on their pension options in the event the advice is not to transfer.
Christopher Woolard, FCA’s Executive Director of Strategy and Competition said:
“These new rules will mean advisers have greater certainty and confidence in what we expect when they offer pension transfer advice.
“We expect our interventions to improve the quality of advice which will help to reduce the number of complaints against advisory firms. We will measure consumer outcomes through our supervisory work.”
“Any changes to our rules on contingent charging could have implications for the supply of advice. Because of the significance of this issue to all stakeholders in the market, we will carry out further analysis and consult on new interventions if appropriate in the first half of next year.”
Wells Gibson welcomes the new rules and fully recognises the need for consumers to benefit from quality financial planning and advice when considering transferring their safeguarded benefits.