Defining Broken Transfers: Is the advice profession heading towards a mis-selling scandal?

    Second article in a summer series...

    While the problems with unscrupulous and unsuitable advice around the British Steel Pension Scheme saga pushed defined benefit transfers into the spotlight – and briefly into the national conversation – there is the feeling among many that DB transfers could evolve into a much bigger problem for the advice profession.

    There have been high-profile mis-selling scandals across financial services for decades – the PPI saga, led by banks, has crowded TVs with nagging claim adverts for years, while the personal pension mis-selling of 30 years ago lives ripe in the memory for some. When claims management companies smell blood there is little to stop them grabbing hold of the mis-selling narrative and bleeding it for all it is worth.

    That said, claims management companies are not the only group to fear. The FCA’s language around DB transfers has grown more assertive over the past few months. In June, when it revealed 162,047 people had left DB schemes, from April 2015 to September 2018, the watchdog said it was “concerned and disappointed” with financial advisers and the high levels of transfers. It even warns it will “shut firms down” if their transfer advice processes were not robust.

    Six weeks after the regulator put its foot down and ratcheted up its language, it appeared to give into pressure from parliament and the outspoken Work and Pensions Committee chair MP Frank Field by proposing to ban contingent charging and bring in other enforcement measures. The regulator is bringing the hammer down on DB transfers.

    For Personal Finance Society chief executive Keith Richards, at least judging by the comments he made while speaking to Professional Adviser, he sees the profession at a bit of a fork in the road. Acknowledging some £60bn has already been transferred out of final salary schemes, Richards can envisage DB transfers doing harm to the advice profession. However, he believes a full mis-selling scandal can be avoided.

    “It’s a problem we could see manifest itself further with mis-selling claims,” Richards admits. “We are hearing things like claims chasers now trying to stimulate claim demand, trying to motivate people to consider compensation. So it’s one of those areas that certainly is a challenge for the whole profession. The problem is with any scandal is that even financial advisers that have not been involved in pension freedoms or DB transfers end up tarnished with the same brush.

    “We can’t stop that genuine story where someone has been mis-advised, and if there’s evidence to prove that’s the case, then that’s wrong,” he continues. “But it won’t be the outcome for the majority – and it certainly won’t be the attitude of the majority.

    “So I think we’ve got to join in with recognising when wrong is wrong. But, like all professions, you recognise wrong but, actually, you’ve got to put a more balanced and objective picture [around it] where the vast majority of people are much better protected and served by receiving professional advice.”

    ‘Advisers thought freedoms changed something’

    Some advisers are not as hopeful as the sector’s top representative that things can be turned around, however. Wingate Financial Planning’s Alistair Cunningham, for example, believes DB transfers will catch up to advisers. That said, he is not sure “how sharp the FCA’s teeth are”.

    The Chartered financial planner predicts: “The reality is it will be a combination of claims management companies and professional indemnity insurers that cause advises the most pain, I suspect.

    “I think the FCA have been very clear from the start and many advisers genuinely thought pension freedom had changed something. The FCA may not have acted as quickly as I might have hoped, or as decisively, but advisers were swept away with a herd mentality – ‘if everyone is doing it…'”

    For his part, Plan Works managing director and paraplanner Nathan Fryer reckons the DB transfer debate has divided people into four camps: those who believe the client should do what they want with their money; those who believe the flexibility and death benefits are worth transferring for; those who believe DB transfers are only suitable in very limited circumstances; and those who are in it just for the money.

    “I am in the camp that DB transfers are only suitable in very limited circumstances, such as ill health,” Fryer adds. “Those that believe the client should be able to do what they want are on rocky ground, in my opinion.

    “The FCA are very clear in the regulations that you need to be able to demonstrate that a transfer is in the client’s best interests and, if you do not have the evidence to back that up, albeit typically based on projections and cash flow, you run the risk of not meeting your obligations.”

    Asked whether it is too late for the profession to turn things around, Fryer believes it is for a lot of people: “I have seen some truly awful recommendations as an outsourced paraplanner, which has resulted in me terminating my relationship with certain advisers.”

    Unlike Cunningham, however, Fryer is a little more hopeful for the advice profession as a whole: “I think we can avoid another mis-selling scandal if we all work together to understand the rules, whistle blow where appropriate and communicate through the professional bodies what good and bad looks like.”

    Indeed, Fryer’s and Richards’ intent to have a pro-active attitude – particularly through the platforms of professional and trade bodies – could be the key to turning the profession away from a full-blown mis-selling scandal. There is an admission a problem exists and that it needs to be solved. Such maturity is not something advisers had in their defence when accusations of  personal pension mis-selling swirled in the 1990s.

    Positivity was not brimming when Gareth Marr, a financial adviser and then-deputy chairman of The Financial Intermediaries, Managers and Brokers Regulatory Association, arrived in defence of advisers and life companies. After a Labour MP said the advice and insurance sector was deliberately downplaying the impact of the SERPs and personal pensions mis-selling scandal, Marr told a national newspaper in 1994: “It’s totally irresponsible to put a figure on it. Nobody knows whether we’ve really got a problem, how big it is and what to do about it.”

    ‘Unfair for advisers’

    Moving onto the controversial and difficult topic of insistent clients, Richards argues it has been an “unfair period” for advisers who have had to face emotional clients who want to transfer out of their final salary schemes and believe it is their right to do so. He says some clients have a “no restrictions, no caps” attitude ingrained in them.

    “Many advisers are adamant that where they felt it was not in the client’s best interest that they stopped the process there after giving the recommendation. But, of course, we know that insistent client facilitation has been conducted across the market.”

    Professional Adviser recently revealed the FCA had gathered some specific data on insistent transfer clients. From April 2015 to September 2018 the regulator’s data shows more than 9,000 insistent client transfers had taken place across the UK – and that the figure rose year-on-year after pension freedoms came into effect.

    “By definition,” Richards adds, “[insistent clients] become potentially even higher risk of future compensation claims because, if an adviser from the outset feels it’s not in the client’s best interest but proceeds with the facilitation, there’s a good chance it won’t be the right outcome. The problem is whether some financial advisers have been pinned as over-commercial and, therefore, that’s the wrong outcome.”

    But, while he notes some advisers may have been “over-commercial” in their dealings with insistent clients, Richards believes some of the blame should be left at the door of the government. After all, it was the former Chancellor of the Exchequer George Osborne who used the powerful words “let me be clear – no one will have to buy an annuity” in front of parliament – and the whole country – in his famous 2014 Budget speech.

    The PFS chief explains: “We must understand the government have given the public the choice. Until the government step in and decide that it’s not in most people’s best interests, then they have a duty to do something about guiding the public more actively from the outset.

    “We’ve not seen any proactive step forward yet from policymakers and what they intend to do – all we’ve seen is a reaction of tougher regulation.”

    Richards is certainly trying to remain positive in the face of adversity he is sure the advice profession will have to take on. However, those who are looking in on advisers and DB transfers from outside of the financial advice arena paint a gloomier picture. Mick McAteer, for example, who was once a board member of the FCA until 2016 and is now an economic and social justice campaigner, believes a full-scale pensions mis-selling redress programme is on the horizon.

    “Nobody forced [advisers] to do this,” he argues. “They were mis-selling – they were after the money because there was large sums of money being dangled in front of them. And people have to ask questions about the actual providers that received the money – should they have been doing more due diligence and asking questions about why this person was transferring so much money when it clearly looks detrimental to their financial interests?

    “There’s a number of parties that are to blame and, ultimately, nobody forced advisers to mis-sell here. But that’s human nature and that’s where the regulator and the government probably have to take the most responsibility.”

    SERPs and personal pension mis-selling

    Peter Pan author J.M. Barrie once wrote: “All this has happened before, and it will all happen again.”

    And, with that in mind, an Independent article from 27 March 1994 highlights some statistics from the SERPS and personal pension scandal that sound eerily similar to the DB transfer suitability data published by the FCA over the last few years. There are certainly some parallels between the pension transfer trends that happened more than 30 years apart.

    The SERPS and personal pensions mis-selling, based on policies sold between April 1988 and June 1994, saw life companies and financial advisers hand more than £11bn of compensation back to savers. Hundreds of thousands of people contract out of a guaranteed, inflation-proof income and into a personal pension.

    The Independent’s piece references research from accountants Coopers & Lyrband, which itself analysed figures compiled by the then-Department of Social Security. The accountancy firm concluded that at least 2.4 million of the 6 million people who transferred out of the State Earnings Related Pension Scheme (SERPS) should never have been advised to contract out.

    The Independent’s article reads: “Published last December, the 24-page report examined 735 representative pension transfers (lump sum payments from occupational schemes) and opt-outs (where employees who are still eligible choose to opt out of their employer’s scheme). It concluded that 91 per cent did not comply with the regulatory requirement to provide best advice.

    “Some 54% of transfers were deemed ‘unsatisfactory’, 8% ‘suspect’ and 29% both. The KPMG report concluded: ‘There is no automatic connection between a client’s file not evidencing compliance and the client suffering financial disadvantage, but non-compliance will in some circumstances result in financial disadvantage.'”

    The piece finds that, in the end, the SERPS mis-selling scandal specifically cost consumers between £200m and £500m in early cancellations and “unspecified sum in erroneous transfers and opt-outs”.

    To put that into context with the modern quandary of DB transfers, the British Steel saga alone, which involved just 2,500 employees leaving the final salary scheme and is but a microcosm of the UK’s transfer activity, has been predicted by an adviser close to the steelworkers to cost the Financial Services Compensation Scheme up to £45m.

    Although that is a more concentrated area of unsuitable advice and may not be representative of transfer advice more generally across the country, the 162,000 people who have transferred out since pensions freedoms across the whole of the UK could command greater redress figures to those involved in the SERPS saga of more than 30 years ago.

    What is more, unless the mis-selling is obvious in the immediate aftermath of a transfer, with clients placed into dodgy or obscenely expensive investments, then the claims will likely manifest themselves further down the road. A lot of the people who have transferred will not realise the potential pitfalls of a non-guaranteed income until they are a fair way into their retirement and the risk of running out of money becomes more worrying.

    ‘There are parallels’

    The personal pensions mis-selling scandal, which was intrinsically linked to the SERPS saga, was much more damaging. In 2002, according to the BBC, the regulator of the time, the Financial Services Authority, revealed the mis-selling cost insurers and financial advisers at least £11.8bn in compensation payments. More than one million people were affected.

    Indeed, Barnett Waddingham senior consultant and pensions stalwart Malcolm McLean, who spent his early career as a civil servant in what is now the Department of Work and Pensions before becoming chief executive of The Pensions Advisory Service (TPAS) from 1997 to 2010, sees some similarities between the SERPS and personal pensions mis-selling to the modern question of DB transfers.

    Drawing parallels between the SERPS mis-selling scandal, he says: “Many consumers were told they would be better off if they bailed out to make their own provision – through either a company or personal pension plan. The government even offered financial incentives to contract out.

    “Something similar is happening today with advisers – perhaps being influenced not by commission as such, but by the benefits to them of contingent charging arrangements and not putting the needs of the individuals first and foremost in their thoughts before recommending a desirable course of action.”

    ‘Should have learnt lessons’

    In the case of personal pension mis-selling, McLean points out, there was no regulatory requirement or guidance of a starting presumption that leaving a guaranteed pension scheme would not usually be in a client’s best interest, unlike the FCA’s and government’s guidance on DB transfers.

    He believes the scale of the problem leads him to believe “the exact opposite was true”. In all other respects, however, McLean argues lessons should have been learnt from the past personal pension mis-selling.

    Indeed, an article from 8 October 1997 in The Law Society Gazette on personal pensions reads: “Many were wrongly advised to opt out of, or not to join, beneficial superannuation schemes offering defined guaranteed benefits.

    “Instead they were persuaded to take out personal pension plans, where the extent of their retirement provision suddenly became dependent on the performance of market invested funds. Inferior personal pension plans were sold to such investors…”

    The article from The Law Society also goes on to explain what happened in the short-term aftermath of the scandal and, perhaps, offers a window to what may come for the financial advice sector. It continues: “In October 1994 the Securities and Investments Board (the original name of the FCA) issued guidelines to all pension providers and financial advisers requiring them to review past sales of personal pensions and to offer compensation in accordance with a ‘specification for redress’.

    “The Personal Investment Authority followed suit in February 1995. The review was a genuine attempt by the regulators to put their industry in order and to ensure compensation was offered to investors who had suffered losses.”

    If things are not turned around in the case of DB transfers, a similar fate could befall the advice sector again in the coming years.

    McAteer, the former FCA board member and economic justice campaigner, who believes contingent charging is commission by a different name, says: “I don’t think [DB transfers are] going to be as big as personal pensions – I’m not saying that – but there are definitely parallels. I think the disappointing thing here really is that, you know, I think the FCA gets wrongly blamed for a lot of things, but in this one, they really should have acted quicker to stop this.

    “All the conditions were there for the mis-selling, with large sums of money involved. There was still contingent commission paid and, when you have large sums of money and conflicts of interest represented by commission payments, there’s always going to be a high probability of mis-selling.”

    Indeed, McLean, the former TPAS chief of 13 years, who offered his opinions to Professional Adviser before the FCA announced its proposals to ban contingent charging, does not have a positive outlook for the advice profession either: “Chickens will come home to roost and DB to DC transfers, prompted by the lure of cash and pension freedom policy more widely, will undoubtedly become the next pension mis-selling scandal to hit us.

    “I believe the FCA knows this and, judging by the nervousness it is demonstrating around the subject as a whole, will want to be doing all within its power to put a lid on the problem before it gets out of hand.”

    ‘It’s going to be difficult’

    It is clear that opinion is divided. Some, particularly those involved directly in the advice sector, are positive that a mis-selling scandal can be avoided. Those who are looking at the sector from the outside, on the other hand, see things differently: they believe a mis-selling scandal will take shape.

    While it is uncertain exactly what road advisers are heading down, there are lessons to be learnt from history. What is more, the matter of DB transfers is not going to go away any time soon.

    PFS boss Richards, somewhat conclusively, says: “It’s going to be difficult to avoid [a mis-selling scandal]. There will always be evidence of people falling into that questionable ‘was it was right to recommend the transfer or not?’. There will be situations where, people under insistent client [labels] will be coached by a claims management company to believe that they were wrongly done by and that they can they can claim thousands of pounds of compensation.

    “So,” he adds, “I don’t think there’s doubt in anyone’s mind that we will see further issues stemming from DB transfers in particular.”