Continuing our blog series, one of the documents produced by the FCA on Friday was a guidance consultation document intended to meet requests from the industry to help advisers understand the FCA's expectations when advising on pension transfers and conversions. The document includes examples of the FCA's views of good and bad practice in the area of defined benefit pension transfers (DB transfers). The stated aim is to "improve the suitability of DB transfer advice" and "to give advisers confidence to give good advice". The FCA expects firms providing DB transfer advice to read the document and once finalised it is intended that firms use it to identify any weaknesses in their existing processes.

The guidance refers to a number of areas including keeping management information, conducting triage services, recording a customer's financial circumstances including other assets and pensions, how to approach a customer's knowledge and experience of DB transfers and investments, a customer's attitude to transfer risk and, separately, to investment risk and guidance on how to address such issues as the Pension Protection Fund, death benefits and insistent clients.

The key theme that comes through is the more detailed the record keeping and specific to the customer's personal circumstances the better. However, for many the guidance note is unlikely to be particularly ground breaking and the examples of good and bad practice perhaps look too much at extremes of advice rather than addressing the grey areas where no doubt advisers would prefer some further guidance from the FCA.

There are some important points to take from the guidance, particularly when it comes to areas where we often see criticisms of DB transfer advice either at FOS or from the FCA. In particular:

  • Know your client / fact find – the guidance sets out the type of information to cover in key areas including a client's personal and family circumstances, financial circumstances including income and current and future outgoings, other assets, knowledge and experience of transferring and investing, attitude to transfer risk, attitude to investment risk and the customer's objectives and needs including any relevant dates and amounts needed to achieve these. The guidance then states: "… If you do not collect the detailed information that you need to give advice, your file is likely to have material information gaps" albeit that this does not necessarily render the advice unsuitable. The FCA places particular emphasis on how questions are asked including the importance of using different question styles and open questions when conducting a fact find.
  • A customer's personal and family circumstances – this refers to family health histories acknowledging that these are relevant but it is the client's own health and longevity that is important and so advisers "should manage client expectations" as a customer may not necessarily inherit a parent's health condition. Enquiries should also be made of the DB scheme to ascertain what spousal and dependant's benefits are available (and Annex 1 includes a scheme data template setting out the information a firm should consider collecting from a ceding arrangement).
  • A customer's other assets including other pension provision – where advice is based on joint finances the information needs to include the spouse's assets and sources of income.
  • A customer's knowledge and experience of transfers and investments – where a client has worked in financial services a firm should still take reasonable steps to assess their knowledge and experience and should not assume that a client is knowledgeable and experienced in investments. When assessing a client's knowledge and experience information should include the types of investments and services with which the client is familiar, the nature, volume and frequency of the client's investment transactions and the level of education, profession or relevant former profession of the client. Although a client may have held investment products the guidance provides that this does not mean that they have appropriate knowledge and experience.
  • A customer's attitude to transfer risk – the assessment is said to be of a client's behavioural and emotional response to the risks and benefits of giving up guaranteed benefits. If a firm is using standard risk profile questionnaires "… it is likely they will not have properly assessed attitude to transfer risk…". The guidance note states – "… a client is less likely to have the required attitude to transfer risk where they want certainty of income in retirement and/or do not want to manage their investments or pay for advice on investments. A client is more likely to have the required attitude to transfer risk where they do not want any restrictions on their ability to access funds and/or want to manage their investments or pay for advice on investments…".
  • Objectives and needs – if a firm gives advice based on objectives such as "flexibility" or "control of my pension" these are "unlikely to be sufficiently personalised to enable a suitable personal recommendation, without further detail". It is also said that a tick box questionnaire is unlikely to enable an adviser to understand a client's objectives properly. An adviser should challenge a client's objectives if they are unrealistic or based on false information with specific reference made here to the PPF. It is said that when balancing needs and objectives adviser processes should adopt a 3 stage process – identify all client objectives and needs, identify where needs and objectives are in conflict and work through specific compromises with the client documenting the reason/rationale. The guidance states "… Its unlikely you will be able to recommend a solution that meets all the client's needs and objectives. The recommendation you make will be based on an overall consideration of whether the client can bear the risk of transfer to achieve their objectives…".
  • PPF – scheme deficits should generally not be used as a reason to transfer and advisers should make it clear to the customer that a scheme deficit does not mean the scheme is about to enter the PPF.
  • Death benefits – unsuitable advice is said to commonly overemphasise the value of death benefits available on DB transfer. Where a customer does have a need for death benefits consideration should be given to life insurance as an alternative to transfer. Consideration must be given to how both the DB scheme and the proposed defined contribution scheme would provide death benefits by making comparisons on a fair and consistent basis at different points in time.
  • Early retirement – customers seeking DB transfer advice often state that they want to retire early but without further information about the underlying reasons and when and how they intend to retire, in these circumstances the advice "may" fall short of the FCA's expectations. "Advisers are not order-takers. You should be prepared, if needed, to tell clients that retiring early is not financially viable…". Where income is reduced as a result of taking a pension early from a DB scheme that should not be presented as a penalty.
  • Pension commencement lump sum – customers sometimes want to transfer to access cash to pay off a mortgage or debt; other options to service that debt must be considered first.
  • 2 adviser model – sometimes the transfer advice is provided by one firm and the investment advice by another. Where there is a 2 adviser model the guidance states that a firm advising on the transfer should not comment on the intended investment explicitly "… If you do, you will carry responsibility for the investment advice as well as the DB transfer advice…".
  • Suitability reports – reports should always be provided in good time and if a ceding scheme is being changed or replaced the report should be provided in draft form with the recommendation only finalised once the change or replacement arrangements are certain (how that works given the time limit on cash equivalent transfer value quotes is not dealt with). The guidance sets out views on how a report should look and with regard to its content with an emphasis on including detail about the client and should "tell the story of your client – who they are, their approach to their financial life and their hopes and ambitions for retirement". The guidance provides that a "good" report is no longer than 10-12 sides and anything over 25 sides should be reviewed.
  • Insistent clients – the guidance says "… If you choose to use the insistent client process, you can still be liable for redress to an insistent client if you are found to have given information in a way that was not in their best interests and is likely to have caused them to disregard your advice and transfer…". When dealing with an insistent client an acknowledgment should be obtained from the client in their own words; standard form wording is said to be unlikely to be sufficient.

It is also worth noting that insurers with practices that require an insured firm to refer proposed DB transfer advice to them before undertaking that advice may be at risk of providing advice on a DB transfer and as a result acting without requisite permissions.

Overall there is a lot of detail in the guidance consultation. For firms that are providing DB transfer advice it is essential reading and for those conducting reviews in light of FCA supervisory exercises it is also worth reviewing to see how files hold up against this proposed guidance.

The consultation on the guidance provides firms with a chance to raise areas where they consider further guidance is needed and to invite the FCA to clarify grey areas. Hopefully this will lead to a more collegiate approach between the FCA and the DB transfer market going forward.