DB transfers – further findings from the FCA's supervisory review
The FCA produced four documents on Friday addressing defined benefit pension transfers – an update on their supervisory work, a guidance consultation setting out examples of good and bad practice, an "advice checker" for consumers (including helping them consider if they should make a complaint) and a policy statement setting out changes to the defined benefit pension transfer rules which are to largely come into force from 1 October 2020. All are essential reading for an area the FCA continues to fixate on and where it has focussed since the April 2015 pension freedoms.
In this blog we look at the supervisory work and during the course of the week we will cover the other developments which will impact on advisers, customers and trustees/employers of defined benefit schemes.
The FCA has been investigating advice provided by firms advising on defined benefit pension transfers (DB transfers) for some time. This latest update on the FCA's findings includes a further sample of 85 unnamed firms responsible for advice on 43% of DB transfers between April 2015 and September 2018. Following desk based reviews and visits, file samples were requested from 55 firms. The FCA also says it has provided detailed feedback to 1,649 firms. Overall the FCA says that 745 firms amended their permissions as a result of interventions.
The FCA found that too many firms are failing to collect information necessary in their eyes to provide suitable advice – so-called files with material information gaps. It is said that the most common areas where there are gaps in the fact find are – (1) anticipated income and expenditure in retirement and how this may fluctuate and (2) customer objectives and the role pensions play in meeting a customer's objectives. Notably in the other documentation produced by the FCA, it is said that a file with material information gaps does not mean that the advice to transfer was unsuitable. This is helpful. However, with the starting assumption that any transfer is unsuitable when it comes to DB transfers, the more detailed information tailored to the customer on the file the better, particularly if a firm faces a complaint at FOS. The level of detail and specificity needed is something that comes through strongly in the guidance consultation.
In this further supervisory phase of the FCA's work, it found 55% of files suitable, 28% with material information gaps and 17% unsuitable. Notably, most of the unsuitable advice appears to have been found in 2016 and 2017 (with 55% and 47% unsuitable respectively). In 2018 60% of the advice reviewed was found to be suitable, increasing to 80% suitable for advice in 2019 (albeit only 10 files were reviewed for that year). Broadly, the FCA's view is that advice is improving. However, despite improvements the FCA say that the 60% for 2018 is "well below our objective for this market".
Within the review were said to be 192 instances of advice on the British Steel Pension Scheme – a particular bone of contention. In these cases the FCA found 21% suitable, 47% unsuitable and 32% with material information gaps.
The FCA notes that it is currently undertaking 30 enforcement investigations and that they have reviewed samples of advice from all 30 firms which will inform their decision-making to assist in concluding those investigations. The FCA also says that it has asked firms to put things right if advice was unsuitable.
The next steps outlined by the FCA include engaging with firms where it has assessed advice processes and/or reviewed files and the FCA expects firms to put in place past business reviews and pay redress where standards have not been met. The FCA is also writing to all 7,700 former members of the British Steel Pension Scheme to help them revisit the advice received and complain if there are any concerns. A further data request is also to be sent to firms with the pension transfer permission.
The update is a further step in the FCA's supervisory / enforcement process for DB transfers. It appears the FCA's focus on identifying historic unsuitable advice is coming to an end with the reported 30 enforcement investigations and other apparent instances where the FCA has invited firms "to put things right". However, the FCA also still appears to be unhappy with the industry despite nearly half of those with DB transfer permissions (745 out of 1,649 firms) dropping their permissions and exiting the market. What the FCA may do next is unclear but the FCA continues to accumulate information on the market and to actively monitor it. Having said that, the 80% suitability rate for 2019 files reviewed by the FCA is encouraging for the market going forward.