Now that the dust has settled on the FCA's latest Consultation Paper on Pension Transfers (CP19/25), is there more to the regulator's proposals than first met the eye?
The majority of press attention on the Consultation Paper has focused on proposals to ban contingent charging for defined benefit (DB) pension transfer advice – quite understandably. However, it is the introduction of a new "abridged advice" process and a presumption that pension transfers should be made into workplace pension schemes that are arguably more important proposals for advisers and their insurers.
The principal aim of the Consultation Paper is to provide a series of proposals intended to reduce the number of consumers transferring out of their DB pension schemes - something that the FCA considers is not in most people's best interests to do. The FCA is also seeking to reduce the scope for conflicts of interest, empower consumers to make better decisions and enable advisers to give better advice. There are two key proposals in the consultation that may have slipped through the net in mainstream media coverage.
Firstly, the FCA proposes introducing "abridged advice", acting as a mechanism to filter out consumers for whom a pension transfer is not suitable. Where a firm considers that it is appropriate to provide abridged advice, it will allow them to provide a lower-cost alternative to full pension transfer advice. Through abridged advice an adviser must still carry out crucial components of the advice process, including "Know Your Client" and risk assessments, but does not require a firm to provide Appropriate Pension Transfer Analysis (APTA) or a Transfer Value Comparator (TVC).
However, through abridged advice, a firm cannot recommend a transfer and can only either recommend that the consumer does not transfer or recommend that they must take independent, full pension transfer advice to establish whether a transfer is suitable. In essence, abridged advice allows the firm to provide quicker and simpler advice, which carries less of a regulatory burden, but which will only result in a "no" or "unclear" outcome for the client.
Secondly, the FCA considers that, where a transfer from safeguarded benefits to flexible benefits is suitable, the presumption should be that the pension funds should be transferred into an available workplace pension scheme (WPS). This is because it is a lower-cost and (likely) lower risk pension than the more usual destinations for pension transfers, such as SIPPs. Furthermore, transferring funds into an existing WPS will be less likely to require ongoing advice and the costs associated with the same.
If they think that another scheme is more suitable, firms will need to demonstrate why that is the case. The FCA has listed some examples of specific reasons it considers as valid for not using a WPS and these are strikingly limited. In essence, the regulator is apparently aiming to prevent transfers into anything other than a WPS, except for previously experienced investor clients.
This proposal has received less media attention than the proposed ban on contingent charging but could have greater ramifications for advisers, since it is likely to reduce the fees advisers are able to earn from ongoing advice charges.
Furthermore, the FCA has provided a clear and unambiguous indication that it will be at the adviser's risk to transfer a pension into anything other than a WPS. If that is the intention, the adviser needs a very good reason to do so.
To read FCA Consultation Paper CP19/25, click here