Financial professionals
In this chapter of our Annual Insurance Review 2023, we look at the main developments in 2022 and expected issues in 2023 for financial professionals.
Key developments in 2022
To continue with tradition, defined benefit pension transfers remained high on the agenda throughout 2022, specifically the British Steel Pension Scheme (BSPS) and the FCA's consultation on a consumer redress scheme under s.404 of The Financial Services and Markets Act (FSMA), published in March. The proposed redress scheme will cover BSPS members who were advised to transfer out of BSPS but excludes advice given by firms that have entered insolvency given the Financial Services Compensation Scheme (FSCS) is available to those individuals. The review period itself is yet to be finalised and we're eagerly waiting to see if the Final Rules will include an opt-in process.
The National Audit Office confirmed that 7,834 of 30,000 BSPS members transferred out into personal pensions with around 4.000 of these transfers likely to fall to the review. Of those who transferred out 95% were advised to do so. The total amount transferred was c. £2.8 billion. The scope for redress remains significant but one welcome development for the advisory community is that recent increases in Gilt yields have generally led to lower redress being payable on pension transfer cases.
Full details of the consultation were set out in the FCA Consultation Paper CP22/6 and the Rules for the redress scheme are due to be published shortly. To what extent these will take into account the industry's submissions on the Consultation Paper is anyone's guess.
What to look out for in 2023
The current 'cost of living crisis' is causing people to look to stored wealth (such as pensions and equity in property) to meet day to day expenses. When combined with a change in regulatory focus toward ensuring good outcomes for retail customers as a consequence of the impending implementation of the FCA's new Consumer Duty (FCA Principle 12), the scope for claims is considerable.
The first battleground could concern pension drawdown; the FCA is currently gathering information on retirement strategies following their work with pension transfers. No specific concerns have been identified yet, but advisors who allowed clients to take excessive income (leading to a risk of running out of money in retirement) could be targeted. This marks the first wholesale consideration of this market since the pension freedoms and is prompted by the size of the market and the number of people drawing down their pension for the first time.
Furthermore, the FCA's 2022/2023 business plan noted that they would be looking at the equity release market amidst concerns that the market was not operating in the best interests of borrowers. As with drawdown, advisors will need to be able to evidence that the decision to access funds was in the client's best interests – simply facilitating access to capital would likely be in breach of the Consumer Duty.
The advent of the Duty is dovetailing with spiralling living costs and could create a perfect storm – expect the FCA to focus heavily on areas such as these, where the temptation to put short term needs ahead of long-term benefits is greatest.
Written by Esme Watson.
Download our full Annual Insurance Review 2023 for more insights.