FCA issues stark warning to DB transfer advisers following review

Hannah Godfrey reports...

The Financial Conduct Authority (FCA) has issued a stark warning to firms operating in the DB transfer arena after gathering evidence that suggests incompetence in this part of the advice market.

On Thursday (6 December) the FCA revealed its latest findings on its multi-firm supervisory work on pension transfer advice, which it has been carrying out since 2015.

In 2018 it collected information from 45 firms, which it followed by carrying out further assessment work, including file reviews and visits to 18 of them. Of those, four either varied or cancelled their permissions following intervention from the watchdog.

Since April 2015, the FCA found the 18 firms it visited gave advice to 48,248 clients on their defined benefit (DB) pension schemes, which resulted in 24,919 pension transfers.

It judged less than half of the advice given was suitable and, while it acknowledged this figure was not representative of the wider market, the FCA said it was “unacceptable” that pension transfer advice should persistently remain at such a low level compared with investment advice.

The FCA warned: “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 that could have caused harm to consumers.”

The regulator highlighted a litany of failures from the 18 firms it probed. It found just 48% of the advice the firms gave was suitable, with 30% found to be unsuitable. It said it was “unclear” whether the remaining 22% of cases were suitable or not.

Litany of failures

Of the 32 files it reviewed from the four firms that either varied or surrendered their permissions following its intervention, just one was identified as a suitable recommendation.

The FCA said the errors carried out by the firms included using generic objectives in factfinds such as ‘flexibility’ or ‘increase pension’ without exploring what these mean to the client. It also said firms were using generic objectives to justify a transfer without obtaining the necessary information about those objectives.

Additionally, it said firms failed to obtain the necessary information about client income and expenditure before making a personal recommendation, and failed to take into account longevity prospects beyond average life expectancy to inform the sustainability of income.

The regulator also said the firms recommended clients transfer multiple DB schemes without considering whether they only needed to transfer out of one scheme to meet their objectives. It found the firms also failed to properly assess the risk the client was prepared to take.

Additionally, the FCA found disclosure and communications were not up to scratch among the four firms – one-third (29%) of communications was compliant, with 62% non-compliant and 9% unclear.

What happens next?

Last month the FCA sent a data request to every single firm in the market that has worked on DB transfers since the pension freedoms. It has now revealed it will use the information gathered to start a “wide-ranging programme of activity” for firms. 

The watchdog added: “Firms should ensure now they have taken on board the issues we have identified, both here and in our new rules and guidance in PS18/6 and PS18/20 so they are able to give suitable advice and meet their ongoing competence requirements.

“We will not hesitate to take action against any firm that continues to present harm to consumers.”