Phase three of the FCA’s review of defined benefit (DB) pension transfers is now in the books, and the report makes damning reading for the firms whose files were reviewed by the regulator, while serving as a warning to all firms with transfer permissions.
The big caveat here is that the 45 firms the regulator initially identified, and the subsequent 18 from which it reviewed files, are not representative of the market at large. But now that the FCA has gathered data from all firms with transfer permissions as it embarks on phase four, advisers will need to look long and hard at last week’s findings.
Tough tones for IFAS
What is noticeable in the most recent presentation of the FCA’s work is the language. The regulator has taken a pasting in the public eye over the past year on DB transfers, stemming from parliamentary scrutiny over its handling of the British Steel Pension Scheme (BSPS).
The tone in this report is altogether more threatening, and indicates some degree of frustration that the regulator’s gentle raising of ‘concerns’ over the past few years has been laughed off by some pockets of the market.
The warning of ‘serious consequences’ for firms who continue to neglect their duty to mitigate the risks poses further questions about what those might entail, but this could be informed by the regulator’s sharpened focus on the actual reasons behind transfer mis-selling.
Some of these are based on misunderstanding or negligence - for instance, reliance on generic objectives such as ‘taking control of their pension’, ‘flexibility’ or prioritising death benefits over existing ones. These are matters of technical competence which firms should, by now, have ironed out.
The senior management personnel at the majority of firms who have suspended transfer permissions this year did not have a luxury villa in the Cayman Islands waiting - they just wanted to placate clients, rather than advise them.
Other examples the FCA mentions are much more malignant, and get to the heart of what we have seen from some of the worst cases over the past two years. This is most evident in its findings around disclosure and communication, where a staggering 61.7% of cases were deemed non-compliant and a further 9.1% unclear.
The FCA points to the use of emotive language, focusing on negative portrayals of DB provisions for spouses and dependants, or early retirement, contrasted against the freedom and luxury of liberating one’s pension. It highlights advisers over-emphasising the benefits of transferring while fear mongering about the scope and protections of the Pension Protection Fund (PPF).
Contingent charging thinking
It is difficult to view this as anything other than salesmanship, conducted in bad faith. It is the very essence of the type of practice from which the profession has tried to distance itself.
In these cases, one suspects the FCA has had its eyes forced open by the problems around BSPS, Clockwork Orange style - forced to watch the human impact of these firms if left unchecked.
The 18 firms reviewed in the latest phase collectively advised 48,248 clients on DB schemes resulting in 24,919 transfers since April 2015. It would be interesting to discover whether any of these firms did not operate a contingent charging model, and the extent to which this may further inform the regulator’s thinking on whether to ban contingent charging on DB transfer advice.
Phase four, the last in a lengthy supervisory endeavour, will most likely determine whether the ‘serious consequences’ manifest themselves as fines, bans or a sweeping mass redress exercise. It may also offer further clarity for the regulator on whether the case for a contingent charging ban should be brought back to the fore.