Defining Broken Transfers: FCA robustly defends its regulation of transfer advice

Third article in a summer series...

When the Financial Conduct Authority (FCA) begun its life back in April 2013, it was adamant it would not become a retrospective regulator but, particularly in the case of defined benefit (DB) transfers, it has had to deal with accusations of responding only after disaster has struck. Speaking to Professional Adviser, however, the FCA strongly refutes that opinion.

When the Financial Conduct Authority (FCA) begun its life back in April 2013, it was adamant it would not become a retrospective regulator. But, particularly in the case of defined benefit (DB) transfers, it has had to deal with accusations of responding only after disaster has struck. Speaking to Professional Adviser, however, the FCA strongly refutes that opinion.

In an exclusive interview with PA, more of which can be read throughout this article, the FCA’s director of supervision, life insurance and financial advice, Debbie Gupta is robust in her defence of the watchdog’s actions on transfer advice. She suggests it is advisers who have failed to raise their game when it comes to DB transfers.

“We’ve been very clear about our expectations of the adviser sector,” she argues. “We’ve been very, very clear about our presumption that for most people, most of the time, [a transfer] is going to be a bad idea. What I think we haven’t seen is the advice sector really responding to that challenge and raising its game.

“It’s tragic to see the cases we do see in supervision of poor practice, of poor customer outcomes – it’s quite horrific.”

While the financial watchdog has discussed, warned, consulted on, and made changes to DB transfer advice regulations over the past five years, many argue it has only just started to act with real intent in a market that has seen more than £60bn leave DB schemes since pension freedoms came into effect. Last month, in July, the regulator proposed a ban on contingent charging ban and a new ‘abridged advice’ rule, for example.

Consultation and final policy papers on pension freedoms – including DB transfers – have been published often since George Osborne announced the policy in April 2014. Indeed, the regulator implements the vast majority – if not all – of its new regulations and rules after consulting on them.

First, it launches a consultation paper to the public and then responds through a policy statement or final policy paper. The policy statement can then often have further consultations launching off the back of it before rules are introduced through the aforementioned final policy paper. The process takes months, if not years, before new or altered rules come into effect.

While it is a thorough process intended to gather as many varied opinions as possible, it does not lend itself to swiftness. The lengthy process leaves the FCA susceptible to complaints it dithers and drags its feet.

Aside from the potential detractions of the regulator’s consultation and rule implementation processes, the FCA did not appear to pay much specific attention to large scale DB transfers as a potential consequence of the pension freedoms policy while it was being introduced.

For example, in a November 2014 policy paper on the retirement reforms and guidance guarantee – just five months before the new pension rules came into effect – the FCA did not make a single reference to DB transfers. It was not until a consultation paper on the proposed changes to pension transfer rules, dated March 2015 and just weeks before annuities would no longer be mandatory, that the financial watchdog made a clear cut reference to DB transfers in its paper. That said, from an early point, through its handbook it acknowledged the government’s guidance that the starting point for a transfer should be to not go ahead with one.

Finally, in June 2015, the FCA came out with a response to its original pension freedoms consultation. In the paper, it printed the government’s predictions that around 35,000 individuals would require advice each year on DB to DC pension transfers and that it would take 7.5 hours to advise on a single transfer. These predictions have proven to be wide of the mark and rather severe underestimations. Later, in November of that year, it again consulted on pension freedoms changes and consumer protections, but work on the transfer value analysis requirements of DB transfers was only a small part of that.

Publishing some guidance on insistent clients in February 2016 aside, it then took another two years for the FCA to target pension transfer advice rules again. At this point, it looked at proposals to replace the transfer value analysis requirement with a comparison showing the value of benefits being given up, among others. When it published its new rules and guidance almost 12 months later in May 2018, freedoms had been in place for more than three years.

These new rules saw it maintain its guidance that advisers should start from the assumption a transfer is unsuitable. It also required all advice on transfers to be a personal recommendation and replaced the transfer value analysis with an “appropriate pension transfer analysis” and a prescribed transfer value comparator to indicate the value of benefits being given up.

‘You can’t win’

As for the argument the FCA has acted retrospectively in the case of defined benefit transfers, Gupta says all good regulators must see how a market evolves and gather evidence of practice before it makes any sort of intervention: “Our mission isn’t just about protecting consumers, it’s also about making sure that markets work effectively.

“There’s a degree to which anything that is rushed risks being poorly targeted, disproportionate and drives unintended consequences. When you look at our supervisory work, and you look at the work we’ve done around both guidance and training in this area, it has attempted to work very carefully with the sector and respond to the way in which this market has been evolving since 2015.”

If the watchdog had intervened in the market all guns ablaze in 2015, when freedoms came into place, the FCA director of supervision for financial advice says critics would have labelled the measures as disproportionate and overcomplicated. “In some ways you can’t win,” she explains. “But I think the right approach for any regulator must be to respond to what is happening, rather than to what you anticipate or believe might happen.

“The scale of what we’re doing has of course escalated because now, for example, rather than sampling what’s going on in the market, we have reached out to every single firm operating in this market around DB transfers. We’ve got a much stronger sense of what’s going on, we’ve got every single one of those firms within our engagement programme, some of which will be visits, all of which will have correspondence and engagement with us. And we are looking at tightening up the rules where we know consumer harm is exacerbated.”

Where does the buck stop?

As for any responsibility the FCA should take for a mis-selling scandal, Gupta believes the buck stops with financial advisers. She argues the regulator’s responsibility is to be “absolutely clear” what good practice looks like and, in the realm of transfer advice, has set the ground rules effectively.

“I don’t think we can be responsible for firms that choose not to play by the rules and choose not to rise to those standards,” she continues. “I think there’s a degree to which the FCA absolutely needs to be on it with firms that aren’t meeting the standards that we’re setting. But I think that’s a far stretch to then say we are responsible for every consumer who is harmed by accessing services that don’t meet our regulatory standards.

“I think there’s a degree to which we absolutely do want to make sure the standards are understood, we do want to make sure we have an ability to intervene quickly with firms that are not providing the right level of advice.”

She adds: “The buck stops with the firm’s providing the service – it stops with advisers. I think we’ve been very clear that anybody operating in the sector that isn’t operating to the standards, that we believe are appropriate, will have to pay the consequences of that.”

‘Not much clear guidance’

For his part, former FCA board member and risk committee chair Mick McAteer believes the FCA should have acted sooner. Speaking with inside experience, McAteer says DB transfers should have been on the regulator’s radar from the early days of pension freedoms. “These are the sort of things where you look at something and go: ‘Well, it’s got large sums of money, conflicts of interest, vulnerable customers – we need to be all over this one because the conditions are there for mis-selling.'”

Similarly, Personal Finance Society chief executive Keith Richards thinks both the government and FCA were slow to respond to the potential issue of insistent clients: “We wrote to the Treasury and to the FCA at that time, asking them to pay particular attention to this issue, provide greater consumer guidance and risk warnings, neither of which were really forthcoming.”

On DB transfers more generally, Richards points to the time when the FCA was thinking about changing its starting guidance that a transfer should not be suitable: “A couple of years ago, just before British Steel, [the FCA was] doing a review, and they stated they were minded it to change that position. Obviously after British Steel they confirmed that they were staying with their original position. So again there hasn’t been much good, firm and clear guidance.

“So it’s all very well being wise with hindsight and being tough about what you expected advisers to do, but as a regulator with history itself, and regulation having been around in the days of the first pensions mis-selling scandal, you would have thought that far more, much clearer and assertive guidance would have been available for the advice sector from the outset.”

Professional Adviser put it to the FCA that advisers and representatives from the advice sector may argue the FCA has not been clear enough on defined benefit transfer advice and what it expects.

“I have no doubt that some firms will continue to say that in perpetuity,” replies Gupta. “Yes, of course, they will say that. I think it’s simply not true.”


DB transfer advice aside, the regulator has come under a lot of scrutiny over the last few years for appearing to be too retrospective. The recent Woodford and London Capital & Finance ordeals, for example, have only served to pile more pressure onto the FCA and add to the narrative it is a reactive watchdog, rather than a preventative one. And now DB transfer advice is threatening to do so too.

Indeed, parliament’s Work and Pensions Select Committee, which is made up of MPs and helps hold the regulator to account in Westminster, called for a contingent charging ban on pension transfers in a report back in February 2018. The FCA responded by saying it was contemplating a ban but, finally in October 2018, said it could not find evidence to suggest a ban would be effective and delayed making a decision.

Wind the clock forward to July 2019, however, and the regulator has now proposed a ban on contingent charging. It took more than 18 months after parliament wanted to see action to prevent consumer harm for the FCA to react – and its response is a consultation on proposals to make changes. It may be many more months before any new rules and protections – whether they be correct, heavy-handed or ineffective – come into place. As a result, people claim the regulator is being retrospective.

“We do understand the accusation that’s levelled,” admits Gupta. “I think it’s difficult. Much like pension freedoms, there will be a number of ways in which the market responds to the introduction of a ban on contingent charging. We know that it’s complicated in the sense that we don’t know quite how the impact will manifest itself, for example in the cost of advice, and the supply of advice, or the extent to which that ban actually helps us regulate more effectively protect consumers more effectively.

“I think in circumstances like that, it’s absolutely appropriate to consult, and to ensure that we have an evidence base on which to set out our assumptions about how we think this will work and allow the industry and the sectors to engage with us on whether or not they share that. Effects of regulation has to be properly targeted and proportionate and that’s what we’re aiming to do here. So I appreciate why people will be calling for faster action – but thoughtful action is probably going to get us to a better place.”

Former FCA man McAteer, however, does not see it that way. He counters: “There seems to be a sort of drift at the FCA at the moment. The FCA, to be fair, sometimes gets criticised wrongly for things, because it does have to have the evidence before it can act. It needs a strong justification for intervening in a market, so we need to sympathise with it on that level.

“But in this case the conditions and all the signs were there and that in itself should have been enough to prompt the FCA into taking tough action. They wait until there’s evidence of things that have gone wrong and they didn’t seem to have the confidence or the desire to intervene early to prevent things from going wrong. They’ve gone back to cleaning up after the event, rather than trying to prevent things in the first place.

“It is human nature, and the conditions and the incentives [in DB transers] to mis-sell were there. It was the job of the FCA to stop them and it was the responsibility of the government to design the reforms that should have worked.”

Indeed, Gupta says the FCA did spot the rising levels of DB transfers that were evident through the increased flows of pension and platform providers back as early as 2017.

“That is why we went out and asked for data and information from every single firm, rather than a sample of firms,” she argues. “The scale of the work that we are doing with those firms is far bigger and we’re covering the whole of the sector now, rather than samples of that sector. So I think our sort of supervisory work in this area have absolutely responded to some of those early indicators on the scale of potential harm.”

She adds: “What does effective FCA intervention looks like? It looks like absolute clarity about the rules against which we are assessing firms. It looks like absolute coverage and engagement with firms to understand and be able to respond to the data that we’re seeing.

“But more importantly, [assessing] where we need to take more assertive action, including enforcement action, and being ready to do so. And getting all of that work lined up so that we can touch every one of those 2,500 firms is quite a big challenge.”

Read more from this series:

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

Defining Broken Transfers: How pension freedoms were rushed into place