Entrance view from the inside of the building.

FCA advice checker – FCA statement on what customers should look out for in DB transfer advice

11 June 2020. Published by Rachael Healey, Partner

Wrapping up the documents published by the FCA on 5 June 2020 on the issue of defined benefit pension transfers (DB transfers), we address in this blog the FCA's "advice checker".

The introductory statement provides "Find out if the advice you received was right for you, and what to do if you think it wasn’t". The advice checker refers to the FCA's assessment of DB transfers over the period from April 2015 to 2019 and that the checker can be used to help customers decide if they have received poor advice and what they can do about it. 

The FCA's list of questions / statements that "may be more likely" to show a customer received "poor" advice

The checker says that if the adviser failed to ask all of the following questions the customer "may be more likely to have received poor advice":

  • Information about the customer's family, and how much income the customer needs to support their family during retirement;
  • Information about the customer (and where relevant their spouse/partner) and employment, current income, spending, tax position, entitlement to state pension or state benefits;
  • Information about the customer's health (and spouse/partner where relevant);
  • The customer's and their spouse's other pensions and assets or debts and any dependency on state benefits (and partner's details, if relevant);
  • Priorities and spending plans for retirement;
  • The risk the customer felt comfortable with and the extent to which the customer was prepared to accept a reduced lifestyle in retirement if investments performed poorly.

The checker also provides that if any of the following statements are true, the customer again "may be more likely to have received poor advice":

  • The adviser did not check the customer's understanding of a DB and defined contribution pension scheme and their risks and benefits, or explain these so the customer could understand what they were giving up;
  • The adviser did not consider how the customer could achieve the retirement the customer wanted by keeping their DB pension;
  • The DB pension transferred was the customer's only or largest guaranteed pension and the customer had few other assets to support them in retirement, apart from the state pension;
  • The adviser recommended a transfer and purchase of an annuity even though the customer was in average or good health;
  • The adviser did not show how the customer could meet at least their essential income needs such as paying bills and rent from the DB pension for the customer's lifetime and instead focussed on one or more of the following – (1) flexibility and control of the customer's pension, (2) maximising death benefits payable in the event of death, (3) helping the customer retire early and (4) helping the customer take a larger tax-free lump sum;
  • The customer did not believe the sponsoring employer of the DB scheme would continue in business and the adviser did not show how the customer's retirement needs might be met if the DB scheme fell in to the Pension Protection Fund;
  • The customer is in a scheme recommended by the adviser where the charges are much higher than expected;
  • The adviser recommended the transfer to maximise potential good investment returns and did not show how the income might reduce, keep up with inflation or last into a customer's later years if the investment returns were poor or charges were high;
  • The customer's pension funds are invested in hotels, student accommodation, storage pods, leisure developments, parking schemes, forestry, precious metals/stones or other unusual investments;
  • The adviser recommended against a transfer but (1) hinted the customer should transfer anyway, (2) did not explain the value of the existing DB scheme, (3) did not explain the risks of a transfer and (4) gave a list of risks of proceeding with the transfer without making those personal to the customer.

The FCA's view on what a customer should do next

The checker says that if a customer agrees with at least one of the statements set out above, and there are quite a lot, "it is possible you may have received poor DB transfer advice and you might have a valid complaint". 

However, the checker also helpfully goes on to say "… If you were always going to transfer, no matter what your adviser said about the disadvantages, it is less likely that you have a complaint".  A recognition by the FCA of the issue of causation which many of us feel is often overlooked.

The checker then sets out how a customer can complain to a firm and FOS.  It also says that a customer does not need a claims management company to help them make a complaint as the FOS will investigate any complaint independently.

What next?

Its an interesting development for the FCA to set out its views quite so explicitly on what may constitute "poor" (notably not unsuitable) advice and provide guidance for customers on how to make a complaint.  The FCA is of course actively writing to all members that transferred their DB pension out of the British Steel Pension Scheme at the moment on what we assume will be similar terms to that in the advice checker.

In terms of how the FCA is approaching its concerns with the DB transfer market, the FCA has other tools in its weaponry to address these.  We know supervisory work is ongoing and there are some past business reviews being undertaken, but the FCA appears to have stopped short of a consumer redress scheme which would have impacted the entire market.

The FCA's remarks in the advice checker about customers that would have transferred regardless of any advice they may have received are also helpful.  And something to be raised at FOS where appropriate.  The reference to claims management companies is also an interesting one and perhaps the next supervisory focus for the FCA will be those companies and the charges they levy?