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Pension transfers advice rules published but further consultation required

The FCA has published its Policy Statement on Advising on Pension Transfers (PS18/6), providing its final rules and guidance on this area, but said it is consulting further on issues such as contingent charging and triage services.

The new rules and guidance include;

• requiring transfer advice to be provided as a personal recommendation that takes account of a consumer’s individual circumstances. The Regulator has added guidance to COBS 19.1 to remind firms of the suitability requirements when providing personal recommendations.

• replacing the current transfer value analysis (TVAS) with a requirement to undertake a personalised analysis of the consumer’s options and a comparison to show the value of the benefits being given up.

• retaining the starting position that a transfer would be “unsuitable”- however, this will form part of the ongoing consultation on charging.

The new rules follow a period of consultation within the industry against a backdrop of increased demand for pension transfers, and in particular, people looking to move their final salary (DB) pensions into the DC environment to take advantage of pension freedoms.

In respect of transfer analysis, the FCA has adopted its original proposals (published in CP17/16) including an Appropriate Pension Transfer Analysis (APTA) and a mandatory Transfer Value Comparator (TVC).

It said an “effective APTA” should help to demonstrate the suitability of the personal recommendation. “The APTA can incorporate both behavioural and non-financial analysis, as well as considering alternative ways of achieving client objectives. We consider that the APTA gives firms a greater degree of clarity about our expectations than if we simply extend the current requirements. Firms should already be providing suitable personal recommendations which are based on an analysis of the client’s circumstances.”

Also, when using cashflow modelling tools firms should be aware of their “limitations” the Regulator said, which “cannot be used to limit advisers’ responsibility for providing suitable advice”.

A Transfer Value Comparator will be mandatory. The purpose of the TVC, the Regulator said, is it shows a comparison of the CETV and the estimated cost of acquiring the same promised income in a DC scheme. As such it will “provide consumers with some context for the level of their transfer value to help them make an informed decision. That context is the cost of providing the same benefits as the DB scheme but in a DC scheme.”

The new rules require the Pension Transfer Specialist to “go beyond just checking the numerical analysis”. They must now:

• check the entirety of the advice process, not just the numerical analysis, and consider whether the advice is sufficiently complete

• confirm that the personal recommendation is suitable

• inform the firm in writing that they agree with the advice, including any recommendation, before the report is given to the client. This means any disagreements between the PTS and the adviser must be settled before the client is given the suitability report.

Consultation Paper

The regulator said the reason for further consultation, via CP18/7 was in order to seek “to improve the quality of pension transfer advice provided”.

The proposals the Regulator is consulting further on include:

• raising qualification levels for pension transfer specialists (PTSs) to require them to obtain the same qualification as an investment adviser

• guidance to clarify its expectations that advisers should be exploring clients’ attitudes to the general risks associated with a transfer, in addition to their attitude to investment risks

• guidance to illustrate how firms can carry out an appropriate ‘triage’ service (an initial conversation with potential customers), without stepping across the advice boundary, by providing generic, balanced information on the merits of pension transfers

• a requirement for firms to provide a suitability report regardless of the outcome of advice.

It is also consulting on introducing a ban on contingent charging, which is when a fee for advice is only paid when a transfer goes ahead, stating that the area is “complex” and “any action taken may have an impact on access to advice.”

The Regulator said it was unable to change the requirement that pension holders seek advice for funds over £30,000 because it is set out in legislation.

Responding to the paper, Kay Ingram, director of Public Policy at national IFA LEBC, said the firm would support a ban on contingent fee charging for this advice. “We cannot escape the conclusion that a contingent fee structure must inevitably bias the advice in favour of recommending a transfer,” she said.

In respect of starting from the standpoint that transfer would be unsuitable, Ingram said: “We believe that all advice should start from an impartial standpoint and needs to take full account of individual circumstances. For this reason, we would not agree that advisers should assume a transfer is unsuitable, even if in a majority of cases it may well be.

“The consumer is paying for impartial expert advice which takes all of their circumstances into account and that is what they should receive with no bias towards transferring or remaining in the scheme,” she added.

However, Andrew Tully, pensions technical director, Retirement Advantage called that the starting assumption that advisers need “to evidence a transfer is in the client’s best interest unless proved otherwise” as a “positive move”.

“By transferring a DB pension someone is giving up very valuable guarantees which mean these decisions should never be rushed or taken lightly or without the protection of proper regulated financial advice,” he said.

“As an industry we have focussed on transfer value analysis (TVAs) reports which can be a blunt tool so it is good to see the regulator has recognised the advice process needs to be more around the suitability of the transfer rather than focus on the raw numbers. Most people understand £’s better than %’s. DB transfers and pension freedoms require that holistic financial planning be at the centre of individual choices and options, not business models or default solutions via an industrialised process.”

He added: “Transfer values continue to look attractive and I’ve often seen values above 30 times income and, in some examples, even higher. The ability to use the pension freedoms to create a financial plan which works for both the customer and their dependents has strong appeal, especially when you compare the flexibility of combining drawdown and guarantees from annuity with a traditional DB pension.

“Despite some recent very poor practices in the market which have rightly been called out, I remain of the view that transferring a final salary pension can work to the customers’ advantage in some circumstances, but for the majority retaining the DB membership will continue to be the best course of action.”

Download the FCA policy statement here

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