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Pension switches: 4 essentials to stay compliant

ATEB Consulting’s Steve Bailey analyses a recent FOS case and the compliance issues it flagged around pension switches

A recent decision by the FOS to uphold a complaint against Intrinsic Financial Planning highlights several issues with how many financial advcie firms have been dealing with replacement business and, in particular, pension switches.

The case in question concerned a client who had two personal pensions, totalling around £40,000 in value. The client was advised to switch both plans and the firm set the new plan up on the basis of 5% initial and 1% ongoing adviser fees. The Ombudsman’s decision can be read here.

In our experience, the firm’s failings in this case, as reported by FOS, are not uncommon, namely:

• Failure to disclose

• Failure to provide a suitability report in good time before the client was committed to the switch;

• Failure to do and/or provide a costs and features comparison

• Rationale for the advice is flawed.

Let’s look at each of these in turn.

1. Disclosure

According to the FOS papers, the client was not aware of the fees that the firm intended to charge, indicating that the requirement to disclose status, services and fees at the earliest opportunity was not met.

2. Suitability report

She only became aware of the charges when she eventually received a suitability report… and she only received that some time after the switch was done and she had cause to complain about the new plan!

Now, there is room for interpretation around when a suitability report must be issued, mainly to do with legal definitions of when a contract is ‘concluded’. That apart, at the time of advice, the time scale for personal pension plan recommendations was by no later than the 14th day after the contract was concluded and the firm would appear to have missed that target.

Under MiFID II, the required timing is before the contract is concluded. ATEB’s view is that the surest way to meet the requirement is to issue the report ‘pre-sale’, i.e. before the client has made a decision to proceed or completed an application.

3. Costs and features comparison

When doing any replacement business, including pension switches, a costs and features comparison must be done.

Contrary to what many firms still appear to believe, it is not sufficient to compare plan A charges with plan B charges. ALL charges must be taken into account in the comparison, platform charges, fund management charges, plan charges AND initial and ongoing adviser charges.

When done correctly, this comparison will often demonstrate that the switch will result in the client incurring higher charges overall than staying in the existing plans. This does not preclude a switch, but does place a greater onus on the adviser to demonstrate that other factors make the switch suitable for the client.

4. Rationale for advice

In this case, the firm’s justification for the switch was to reduce charges. Laudable, but the switch actually increased charges.

The other ‘reasons’ the suitability report indicated were things like access to self-investment and flexibility, neither of which were evidenced as being of interest or relevance to the client.

The most likely explanation for these factors being mentioned is that they are standard generic text in the suitability report template. Rationale for advice should be client specific, not generic.

We regularly see client objectives not met by the advice or the reasons for recommendations not actually being applicable. It is clearly essential to ensure that advice meets the clients identified requirements and does what it says on the tin!

Our view

The FOS decision in this case serves to confirm both required and good practice in relation to pension switches and as a reminder to disclose charges in good time, issue suitability reports pre-sale, compare the before and after situations not just the plans and make sure recommendations actually meet the client’s needs and best interests.

We recommend firms review their replacement business process to ensure it meets all the regulatory and good practice requirements.

See also: File reviews – 12 things we see too often

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