Pension Transfers – FCA provides an end of year report

14 December 2018. Published by Matthew Watson, Senior Associate

As the end of the calendar year approaches the FCA's recent publication indicated that the regulator remains concerned as to the suitability of pension transfer advice. If the FCA's recent review was an end of term school report this would be best summed up as "could do much better".

At the end of last week the FCA released an update following their review of a further sample of transfers, identifying that less than 50% of the advice they reviewed was deemed suitable.


The FCA collected information from 45 firms and conducted a file review on 18 of them. It is understood that of these 18 firms advice was given to 48,248 clients on their DB pension schemes. The regulator carried out a review of 154 transfers. The FCA report noted:


"We are disappointed to have found that less than 50% of the advice we reviewed was suitable. Our results are based on our targeted work and are therefore not representative of the whole market. However, it is particularly concerning that, despite our feedback to the sector, firms are still failing to give consistently suitable advice."


The FCA's findings identified that of the sample cases reviewed 48% were suitable, 29% of cases were unsuitable and 23% of cases were unclear. The "unclear" cases had been categorised where firms failed to collect key information as part of their fact finding or where they did not conduct sufficient analysis to demonstrate (for example in the suitability report) why their recommendation is suitable.


The FCA made clear that their efforts to improve the standards of advice were unrelenting. The clear message was that the FCA would not hesitate to use their investigatory powers where they consider there is evidence of misconduct.


The Key Findings


The key findings from the FCA's recent review were as follows:


  1. The FCA remains concerned that the transfer advice in a number of cases does not take account of the client's individual needs and circumstances.
  2. There is also concern that at the senior management level not enough is being done to identify and mitigate the risks associated with DB transfers. This is said in some cases to be down to managers misunderstanding potential conflicts of interests caused by their charging structures.
  3. The FCA had identified that in some cases where there are volumes of transfers the processes adopted by advisers does not take into account the individual needs of the customers.
  4. The FCA was in praise of those firms where the senior management had adapted their controls and compliance checks in recognition of the "high risk nature of this type of business".

The FCA's recent publication has prompted a mixed response from commentators. The former technical specialist at the FCA noted on his website at the end of last week that he had little sympathy for advisers involved in the advice process suggesting the "sector has had everything it needs from the FCA" to ensure it remains compliant. One of the key issues that some commentators in support of the FCA's crackdown on unsuitable advice have identified is that too often some advisers are using generic objectives when assessing a client's decision to transfer.


However, the FCA's report was not welcomed by many advisers with the chief executive of the Personal Finance Society labelling it as "reckless and wholly disproportionate”. The criticism was based on the fact that the regulator's assessment was based on only a limited sample which is said to be insufficient to make any conclusive findings. The FCA's publication has also been criticised as scare-mongering the public and may "serve to compound the issue".


There is certainly a danger that the FCA's publications make an already difficult market more hostile for advisers and their professional indemnity insurers. No one would suggest that taking steps to identify "rogue advisers" lacks merit but the regulator's heavy-handed approach has the risk of tarring all advisers with the same brush. The target of "rogue advisers" makes for an uncontroversial soundbite as was seen from the Prime Minister last week when Mrs May indicated that she would ensure that the Treasury looks at the issue with the FCA. However, the reality is that the number of actual "rogue advisers" are minimal in the context of the whole DB transfer market. There is risk from the public's perspective that the labelling of "unsuitable" advice becomes bundled up with actual fraudulent activities.


The unwelcomed knock-on effect of a heavy handed approach by the regulator may also result in professional indemnity insurance becoming too expensive for some firms as the fear of DB transfer claims and liabilities increases. This could mean that there are more firms advising without the necessary cover which will clearly not serve customers well in the longer term. The FCA are alive to the issue of the "advice gap".  However if DB transfer advice simply becomes too expensive for smaller to medium sized firms to advise upon this could result in a restricted market of advisers which may mean higher costs for customers. The regulator will therefore need to keep in mind the longer term impact of overly burdensome regulation and the danger that this could result in a widening of the advice gap.