Defining Broken Transfers: Were advisers qualified enough to tackle DB transfers?

    Sophie King writes...

    The introduction of pension freedoms pushed defined benefit (DB) transfers to the fore and not only did it test the financial advice profession, but the increased demand for transfer advice has also tested the qualifications advisers must attain.

    The introduction of pension freedoms pushed defined benefit (DB) transfers to the fore and not only did it test the financial advice profession, but the increased demand for transfer advice has also tested the qualifications advisers must attain.

    The FCA has started cracking down on financial advice in the last few months after voicing its displeasure with the high rate of DB transfers. From proposing a contingent charging ban and introducing the idea of ‘abridged’ advice, to saying it was “disappointed” with advisers and would “shut down firms”. And that is all before advice giant LEBC recently halted its transfer work after a review from the regulator.

    Before April 2015, in order to give advice on DB pension transfers, advisers had to hold a Level 4 qualification in pension transfers, a rule that came in following the introduction of the Retail Distribution Review (RDR) in 2012.

    RDR brought with it better transparency in the investment and advice markets. The Level 4 qualification in pension transfers that came along with it, however, became the minimum standard required to give regulated advice on the matter and gave advisers the same level of authority as a pension transfer specialist (PTS).

    Qualifications needed to advise on pension transfers predominantly remained the same after pension freedoms, although there were a a few tweaks here and there from various governing bodies. According to Personal Finance Society (PFS) chief executive Keith Richards, the Financial Conduct Authority (FCA) decides which aspects must be tested in a qualification for a person to be qualified to the minimum level for regulated activity.

    Then, bodies like the PFS’s parent organisation, the Chartered Insurance Institute (CII), submit qualifications for FCA approval against these standards and, if they meet them, see them become approved. The process does not end there, though. Every time the FCA updates the examination standards, the awarding organisations, like the CII, must also update their material. Richards says the CII also reviews qualification content every year, as well as at times of significant change.

    ‘Review at times of significant change’

    Qualifications remained largely the same either side of pension freedoms – but the need for advisers to enhance their knowledge of pension transfers grew significantly. That said, the CII did introduce a stand-alone unit R08: Pensions Update on 3 August 2015, which ran until 31 August 2018. The objective of this unit, Richards says, was to help advisers develop a knowledge of customer needs and how financial services, professionals and organisations identify and provide for those needs.

    It covered changes that were introduced by the Taxation of Pensions Act 2014 and alterations to the state pension provision from 6 April 2016. Richards adds this unit was only required for a short period to “bridge the gap” until it could be incorporated within the relevant units for first time qualifying professionals.

    In addition, the CII changes were aimed at individuals who had already obtained the existing Level 4 and 6 pension units – those that were needed to advise on pension transfers – but were looking to demonstrate their knowledge was up to date with the changes. The transfer of DB pensions pre-freedoms, Richards adds, was only undertaken by specialists who needed to hold advanced qualifications such as G60 – the pension transfer and advice standard.

    For her part, The Money Panel founder and financial planner Catherine Morgan remembers feeling overwhelmed when pension freedoms came into place and noticed advisers felt the need to gain more qualifications. But, as well as qualifications, thousands of adviser firms sought to gain permissions to advise on pension transfers as demand boomed once George Osborne’s revolutionary pension freedoms policy came into effect.

    A freedom of information request submitted to the FCA by Professional Adviser found that, by March 2018, 2,728 firms had applied for pension transfer permissions after April 2015. The vast majority (95%) were approved in that period, with just 134 applications either withdrawn or rejected.

    “Post-pension freedoms there was a clear need for more advisers to enhance qualifications under these extenuated circumstances in this area due to the extra technical advice they needed to understand and dispense,” PFS chief Richards continues. “It is ultimately the regulated adviser who is responsible for the suitability of their recommendation to meet a client’s needs and objectives, while ensuring it is aligned to their attitude to risk and capacity for loss.”

    The fact the CII developed qualifications after freedoms, Richards adds, reflects an increasing interest in specialist pension qualifications now that new options exist. He tells PA that, since pension freedoms were introduced, they have seen a modest increase in advisers gaining these qualifications aligned with the growth in demand for greater knowledge.

    For Leicester-based IFA Scott Gallacher, it is not the case that advisers have not been qualified or well-trained enough. Rather, he believes it is the fact DB transfers are a “complex and contentious area”.

    He adds: “There was a lack of time for any real guidance, but I don’t think that would have given advisers too much of an issue.” Nevertheless, he thinks the issue is that the regulator did not anticipate the “perfect storm” of pension freedoms and the effect it had on the public’s appetite for transferring their pension schemes.

    Indeed, Montfort financial adviser Alex Norwood reckons the FCA did not need to give advisers and bodies more support. That is because, in his view, advisers should at least have the R08 qualification to keep abreast of the changes. “It is a short exam which should be undertaken by those who have not completed the latest R04 or advanced exams,” Norwood adds.

    ‘Sufficient demand’

    In September 2017 the Chartered Institute for Securities & Investments’ (CISI) Level 6 DB transfers qualification was approved by the FCA. This qualification was already available for registration for candidates who held a Level 4 qualification and Statement of Professional Standing.

    CISI global director of learning James Stockdale says it introduced the qualification as a result of listening to its members. Exams like these are built and regularly monitored by practitioner exam panels in conjunction with its in-house qualification specialists, which is then overseen by an exam board.

    CISI head of financial planning Jacqueline Lockie explains: “The CISI started offering a pensions exam at level 6 post-pension freedoms as we found our members, who were traditionally working in the wealth management and more recently in the financial planning areas, were finding the increasing need to provide more complex pensions advice and sophisticated retirement guidance.”

    Philip J Milton Chartered wealth manager and pension technical specialist Philip Milton argues DB transfers have been difficult to achieve. Milton advised on pension transfer before and after pension “liberation”, as he calls it. He reckons the CII qualifications he personally gained in response to pension freedoms prepared him for DB transfers and endorsed the work his firm were already doing.

    All in all, changes were minor but regulatory bodies did respond to the effect pension freedoms would have on DB transfers. As Echelon Wealthcare managing director and IFA Alastair Rush puts it, the additions and changes were “fine tuning around the edges”.

    ‘Lack of time for any real guidance’

    For the PFS chief executive Richards, though, regulation regarding DB transfers was not portrayed well enough. “Both the government and the regulators were aware that it was not in most people’s best interests to transfer from a company scheme,” he says. “Guidance from the regulators on what we now term insistent clients was not clear and we need to take collective responsibility and adopt a joined-up approach to support the public in relation to their long-term financial wellbeing.”

    Taking a different view, Milton believes the FCA did offer enough support to advisers but said there had been “many sharks” out there who pushed transfers and the use of wholly inappropriate investments with the pots. This is where he feels action was “taken far too late”.

    Be that as it may, the FCA itself did not seem to trust advisers were getting its messages regarding DB transfer advice. From October 2018 through to March 2019, the regulator held interactive workshops across the UK for firms that were qualified to give DB transfer advice.

    It held some 28 sessions across the country – locations ranging from Cheshire and Coventry to Leeds and Southampton – between October 2018 and January 2019. The first 12 sessions, which could hold up to 60 advice firms, all sold out. The regulator then extended the series until March 2019 after each of the initial 12 workshops had sold out. The watchdog says the workshops highlighted key points firms should consider when operating in this market and would reinstate its expectations when undertaking this business.

    The workshops also highlighted the updated FCA rules and guidance and include an interactive case study to put into practice its expectations. These workshops and their agendas could indicate the FCA may have felt advisers were not qualified enough to deal with the scale of DB transfers post-pension freedoms – or at least it thought advisers would need the extra support. The advisers PA spoke to, however, saw the regulator’s efforts in a positive light.

    Rowley Turton IFA Scott Gallacher argues: “The FCA should be applauded for touring the country and engaging with financial advisers in this way. Too often the FCA is criticised for shutting the stable door after the horse has bolted. This time I’d suggest the FCA have tried to shut the door just in time.”

    For his part, IFA Milton opines that in the spirit of positivity, the FCA was hoping it would confirm and endorse the very best of what was already happening within the industry, even if it may have been a slow reaction. Even though ‘reviews’ from the FCA are good, he feels it does not happen anymore because of the “heightened vulnerability to the adviser”.

    “The FCA’s reaction to the inappropriate behaviour, which was clearly prevalent in the marketplace, was what was too slow,” he adds. “I feel professional advisers were ready and have continued to tweak reviews and recommendations as ‘things’ and information have developed.”

    The question at the end of this article remains that, if advisers themselves, professional bodies and indeed the FCA took the view the profession were qualified enough – and well-trained enough – to tackle the soaring demand of pension transfer work after pension freedoms, how has it come to a point where the FCA is cracking down on advisers and transfer advice?

    Indeed, LEBC’s recent halt in transfer work after a review by the regulator is the perfect example of the watchdog’s stamp of authority in this sector. If everyone involved felt prepared enough for the demands of DB transfers, why does the FCA feel the need to crack the whip four years after DB transfers became mainstream?

    The next two articles in this series will tackle the topics of insistent clients and contingent charging, which could shine some light on that question. Indeed, some of the previous pieces in this series may do so too.

    Read more from Defining Broken Transfers articles: 

    Defining Broken Transfers: How British Steel brought DB transfers to the fore

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

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

    Defining Broken Transfers: How pension freedoms were rushed into place