Nervousness over pension transfers has understandably reached fever pitch over the past year. In this area of advice, the Financial Conduct Authority (FCA) is in an unenviable position of gathering polarising viewpoints from across the sector and trying to decide what course of action leads to the best possible customer outcome.
An added element to the regulator’s already challenging balancing act is it must ensure its decisions do not exacerbate the already substantial advice gap. All things considered then, the FCA’s latest policy statement PS 18/20 – Improving the quality of pension transfer advice – brings a sensible tone and package of solutions to key issues around what is, for many people, the most important piece of advice they will ever receive.
One area that has divided the industry is contingent charging and, while a ban had been explored, we are pleased to see that a decision has been delayed as it would have produced unintended but still damaging results. Among other things, a ban would create a barrier to advice through being unable to facilitate its provision to clients who may not have sufficient capital to pay upfront initial advice charges.
We cannot deny, however, that contingent charging can arguably introduce a conflict that needs to be managed effectively. As part of its ongoing review, the FCA could consider introducing further guidance on what it sees as the best way to manage conflicts – for instance, recommending firms have in place robust controls such as preapproval of all cases by a compliance department that independently checks all aspects of the case to determine suitability.
Outsourcing has also given the FCA some pause for thought. Financial advice and planning is most effective when it is an ongoing review of people’s financial situations. So dividing out that advice by outsourcing parts can mean that consumers are not obtaining the best possible advice.
Only pension transfer specialists can give pension transfer advice, however, and so partnerships between advisers are common. To ban a two-adviser model would – in a similar vein to contingent charging – widen the advice gap by reducing an already limited supply. The nature of that relationships needs to be clear. A decision to transfer a defined benefit pension cannot be properly considered without an understanding of the subsequent investment.
Anyone considering a pension transfer needs a full understanding of the responsibilities they will be taking on. Managing the pension investments on an ongoing basis and bearing all the investment risk through the ups and downs of financial markets needs to be clearly explained to the client. The FCA has now formally required pension transfer specialist to have a high level of investment knowledge – to the extent they must take a new exam.
Within Intrinsic we already require that just one adviser, the pension transfer specialist, is ever involved in the process. We do not have separate advisers providing the pension transfer and investment recommendations.
Outsourcing has its place but we may start to see a substantial decline of two-adviser models when it comes to pension transfer advice.
The demands on advisers are high and constant regulatory changes can make it hard for them to operate. That said, the changes announced by the FCA provide clarity as to what it expects and should give the industry and the public confidence in this area of advice.
Andy Thompson is CEO of Intrinsic, part of Quilter