Pension freedom rights ‘eroded’ by Dear CEO letter

Hannah Godfrey reports...

The recent ‘Dear CEO’ letter sent by the FCA to pension providers could mean pension freedom for defined benefit (DB) scheme members are “being eroded”, one SIPP provider has warned.

Last Friday (22 March) the Financial Conduct Authority (FCA) sent out a letter addressed to the CEOs of major pension providers.

The regulator said the letter was the result of a review into pension product providers that sought to identify the key drivers of harm with respect to DB-to-DC (defined contribution) transfers.

The letter said: “We expect you to have appropriate measures in place to ensure that products are being recommended responsibly and appropriately, in accordance with the treating customers fairly principle.”

In response to the letter, investment manager Intelligent Money, which also administers self-invested personal pensions (SIPPs), decided to stop taking DB business onto its books.

Letter ‘rips up COBS principles’ 

Intelligent Money chief executive Julian Penniston-Hill told RP’s sister title Professional Adviser the letter undermined parts of the Conduct of Business Sourcebook (COBS) rules that relate to reliance on other firms.

As such, he argued, it means pension providers now take on additional responsibility for pension transfer advice given by financial advisers.

“There’s no way we can please [the FCA],” said Penniston-Hill. “This isn’t a reminder of an existing rule, guideline or principle, it is a brand new one.

“The letter moves the goalposts. Prior to this letter on Friday, we had, as we rightfully should have had, complete responsibility for ensuring we only allowed investments into suitable assets for pensions schemes.

“We did that by prohibiting what we are now calling ‘non-standard assets’. Anything that wasn’t plain vanilla, we prohibited.”

The chief executive said more providers will follow suit, which means pension freedoms for DB scheme members will be “eroded”. He argued that “no provider in the land” is going to accept liability for unconnected, third party advice firms.

“It cuts through a very important part of the COBS Handbook 2.4 reliance on other firms, which, in a nutshell, says unless you have suspicions that you should not be able to rely on a regulated firm, you are perfectly entitled to do so.

“What the ‘Dear CEO’ letter does is rip that up, and says ‘you can’t rely on regulated firms, you need to check they are giving suitable, appropriate advice’.”

Penniston-Hill said the next step could be that the same principle is applied to any form of advice, meaning product providers “simply won’t deal with financial advisers”.

“I can see a return to the old days, whereby the providers had a team of in-house sales/advisers selling their products alone, and that would be a disastrous end to independent financial advice,” he added.

‘Not the most sensible or feasible option’

Claire Trott, who is chair of the Association of Member Directed Pension Schemes, an industry body that represents SIPP and small self-administered scheme providers, agreed with Penniston-Hill’s interpretation of the letter.

“The FCA are now implying that pension providers should be checking that advice given to a client to transfer from their DB pension scheme is suitable,” she said.

“It is clear that the FCA are concerned about transfers from DB schemes and quite rightly want to protect the public, but suggesting that providers are to be the ones to monitor the financial advice being given doesn’t seem like the most sensible or feasible option.”

Trott called for greater clarity from the regulator on the systems and processes required to comply with the levels of due diligence expected.

“Although as an industry we agree,” she added, “DB transfers do need to be monitored, this should be through the FCA monitoring the financial advisers giving the DB transfer advice directly instead of through pension providers.”

Curtis Banks group communications director Greg Kingston added: “The regulator is trying to preserve what it sees as the right client outcomes for clients who transfer from DB schemes, but in doing so is having to take a rigid approach to compensate for the lack of controls elsewhere.

For example, he said, poor client outcomes are clearly being reached in the current regulated environment, and so the regulator wants a backstop protection against those risks.

He added: “What’s probably being lost amid all of this is the portion of responsibility that must be accepted by the clients, and there’s a growing trend to risk-free outcomes for the clients at the expense of others irrespective of the cause.”