FCA: Firms wanting DB transfer authorisation ‘will be scrutinized’

Sophie King reports

The Financial Conduct Authority (FCA) has said that new firms wishing to gain defined benefit (DB) transfer permissions will be scrutinized.

In an update published on Friday (11 June), the regulator said that due to the high risk of consumer harm associated with unsuitable advice to transfer it will thoroughly check applications from new entrants applying for transfer permissions. 

“We test the robustness of firms’ systems and controls, and we ensure the competence of individuals seeking approval.

“Particularly for pension transfers, or those who previously held oversight roles such as senior management functions.”

The FCA said it will apply this approach at “all gateway entry points”. This includes new firm or individual authorisations, variations of permission, appointment of appointed representatives (ARs) and changes in controllers.

If the FCA finds a firm not meetings its expectations, it “will take action”.

‘Thorough due diligence’

Throughout its assessment, the FCA will check a firm’s past conduct and involvement in pension transfer advice.

“Firms applying for new pension transfer permissions will need to provide details regarding the suitability of their past advice, their past conversion rates, particularly where dealing with insistent clients, and any past complaints.”

Firms applying for individuals or ARs to join their firm will need to carry out thorough due diligence on their past DB activity before applying.

Firms must also demonstrate how the DB transfer advice fits with their overall business model and target market. Evidence must be provided to show that they can secure adequate professional indemnity insurance cover.

The FCA added: “Our approach intends to minimise consumer harm. We might request additional evidence to demonstrate the suitability of both firms and individuals to conduct DB pension transfer business.

“We will scrutinise firms’ financial and non-financial resources in accordance with the threshold conditions, to ensure that they have a viable business model.”

FCA’s DBAAT 

In January, the FCA published a Defined Benefit Advice Assessment Tool (DBAAT) which sets out key factors advisers should consider when checking the suitability of advice and disclosure.

Essentially, it should help firms to understand what is expected of them and they can also use it to assess DB advice given before 1 October 2020 – before contingent charging was banned.

The tool, which was used by the FCA in its latest phase of assessing the suitability of DB transfer advice, contains a number of tabs on assessing suitability for a pension transfer, suitability for investment advice and an insistent client process. 

Advisers can input data to then analyse whether a transfer might be appropriate. In the first tab, users are reminded to gather all relevant information from a client, including their employment health and vulnerability.