Another blog, with another DB headline….

The FCA has released finalised guidance to provide non-handbook direction to help advisers understand their expectations when advising on pension transfers and conversions.

They state that a significant number of firms are struggling to give consistent, suitable advice which meets FCA rules. This is largely due to poor practices or weak record keeping. Even where the advice is suitable, the FCA state that they have seen too many poor practices in the advice process based on a misunderstanding of the requirements, poorly designed systems, outdated processes or inadequate disclosures.

The regulator’s stance on DB transfers still remains;

‘We think that keeping safeguarded benefits will be in the best interests of most consumers. So, when giving either abridged advice or full advice, we expect you to start by assuming that a transfer, conversion or opt-out will be unsuitable. For full advice, you should only consider a transfer, conversion or opt-out to be suitable if you can clearly demonstrate, on contemporary evidence, that it is in the retail client’s best interests.’

The paper is split into 5 key topics:

Preparing to give DB advice, initial client interaction, advice process – information gathering and abridged advice, full advice process – research and analysis and suitability. The aim of the paper is for firms to see examples of good practice and assess and identify any areas of weakness within their DB processes that can be improved.

Overall, not much has changed between this paper and previous guidance. We have, however, highlighted some of the key points we picked up from the paper below.

Permissions needed

The FCA has clarified the status of when DB permissions are not needed:

  • When advising on non-safeguarded benefit schemes.
  • When advising on how to structure DB scheme benefits.
  • Pension opt-outs where there would be no redirection of contributions of the FCA-regulated replacement scheme
  • When advising on whether to join a DB scheme.
  • When advising an ex-spouse on pension credit from a pension sharing order.

PI Insurance

Firms must maintain adequate financial resources, including PII for past and current business where there is no break in cover. When a firm is offered PII that contains exclusions or limitations then they need to consider if these unreasonably limit the cover. This could include cover that imposes sub-limits in breach of the required minimum levels of indemnity, or exclusions that conflict with how the firm operates. If a firm does not have the necessary cover, the FCA expect all relevant regulated business, including DB transfer business to be stopped.

Personalised charges

For DB transfer advice, you must give a potential client a ‘personalised charges’ disclosure, based on the actual transfer value, in cash terms, in writing. If you charge as a percentage of the transfer value, you should give the monetary value as soon as you know the transfer value but in good time before providing advice. If you give abridged advice, you should give the charges for abridged advice as well as set out what you would charge for full advice, including the ongoing advice charges, at the start if you have a CETV – but if not then you should work on a standard fee and confirm the actual fee once this is known. For full advice, you should make clear that the charge is payable whether a transfer proceeds or not. You must provide the personalised charges communication before you start the advice process. Consumers need to be able to consider whether they want to incur the costs of advice before you actively undertake any work.

The paper has a key focus on section 4 – information gathering and abridged advice. We recommend firms pay attention to and read this section thoroughly as the FCA outline the levels of details that they expect firms to be gathering on clients. There is also detailed guidance here in regards to gathering the client’s attitude to transfer risk. The FCA state that finding out about the client’s knowledge and experience and risk profile should be done in relation to giving up safeguarded benefits – meaning that the risk assessment is specific to the advice. This then allows you to assess the clients behavioural and emotional response to the risks of transferring away from the scheme. Carve-outs are also covered here, where significant detail is given in relation to clients qualifying for the serious financial difficulty or serious ill-health carve-out, and the type of evidence that should be held on file indefinitely.

The FCA state that unsuitable advice commonly overemphasises the value of death benefits available on a transfer. When considering a client’s objective for death benefits, APTA should show:

  • The need for death benefits.
  • The priority given to death benefits compared to the client’s other objectives.
  • How you have compared the death benefits available from the DB scheme and the proposed DC scheme.
  • How you have considered trade-offs between death benefits and other outcomes, given the client’s other needs and objectives, particularly income needs.
  • How the beneficiaries of death benefits might prefer to receive them and what alternative ways you have considered of meeting their objective, for example by using excess income to buy life insurance.
  • Workplace pensions also get a detailed mention.

These must be used unless there is a justification as to why an alternative is better. The most recent scheme doesn’t exclusively have to be considered, previous workplace schemes can also be considered if these are relevant. The advantages and disadvantages of the workplace scheme must still be discussed even if the client has circumstances for not using one. Plans not allowing ongoing adviser charging is not a strong enough reason to discount using a workplace scheme.

The FCA recently released their DBAAT tool which is all about how they were assessing the suitability of DB files done prior to the 1st October 2020. This links in with the following statement from the guidance paper:

‘If you do not collect the necessary information including, for full DB transfer advice, the TVC and APTA, you must not make a personal recommendation. This is because you cannot be sure that your advice will be suitable. If you make a personal recommendation without this information, you will not comply with the suitability requirements.’

This shows that the FCA could potentially label a file as being unsuitable before the advice has even been taken into consideration.

The FCA and the Pensions Regulator have collaborated with the Pensions Administration Standards to agree on a single set of information that DB schemes should provide automatically with a transfer quotation. This can be found in annex 1 of the guidance paper.