DB Transfers - now what?
We know that the FCA is looking closely at defined benefit transfers; we already have the FCA's review of redress methodology and the defined benefit transfer rules. We now have the results of the FCA's review into defined benefit transfers.
There had been various reports in the financial services press that the FCA was looking at defined benefit transfer (DB Transfer) files. As a result of this review there were a number of reports of firms deciding to stop advising on DB transfers and as a result their permissions changed on the FCA's website.
Tuesday's announcement from the FCA confirms these reports and provides some further detail. The FCA's announcement confirms the number of firms visited over the last 2 years and the sample files it has reviewed.
Referring DB transfer business to specialist transfer firms
Based on the announcement, the key area of concern for the FCA appears to be specialist transfer firms – firms that obtain business from other firms that do not advise on DB transfers. The FCA highlighted the risks for these firms back in August 2016 but says in yesterday's announcement that these firms have not taken those risks on board. In particular, the FCA found:
A lack of information sharing between the introducing firm and specialist transfer firm. This resulted in the specialist firm not having enough information about a client's financial circumstances.
Firms were advising on a DB transfer without knowing where the ultimate funds were to be invested. This was on the understanding that this advice was to be provided by the introducing firm.
Some firms used a transfer analysis based on a default scheme and/or fund, contrary to the FCA's January 2017 alert.
There were potential resourcing issues for specialist transfer firms; these firms had not made sure that there were enough specialist transfer or compliance resources to meet increased demand.
Out of 88 transfers, the FCA found, with regard the recommendation to transfer, 47% of cases suitable, 17% unsuitable and 36% unclear. In relation to the suitability of the recommended product or fund, the FCA found 35% of cases suitable, 24% unsuitable and 40% unclear.
The FCA is already looking at the pension transfer rules under COBS 19. We will have to wait for the results of that consultation. However, the FCA's announcement also says that the FCA will continue to monitor this market and where appropriate assess firms who provide DB transfer advice. The intention is that the FCA will carry out a further phase of supervisory assessments in the current business year.
At the heart of the DB transfer issue is an ideological tug of war between the pension freedoms; wanting to give the consumer choice and autonomy over what to do with their pension and the FCA's consumer focus which appears to prefer that members do not transfer their DB pension.
For consumers, the FCA's focus on this market may lead to less choice as the number of advisers in the area fall and higher costs should consumers want to consider transferring their DB pension. Perhaps an unintended consequence of the pension freedoms?