Concerns about where clients are being invested following a defined benefit (DB) pension transfer are behind a recent flurry of stories about outsourced advice companies suspending their services.
The Financial Conduct Authority (FCA) is clearly worried about how pension freedoms have affected retirement saving in the UK. The rules, which came into force in April 2015, lowered the age at which people could access their entire pension savings to 55.
A report published by the regulator last week highlighted the popularity of the reforms: more than 1 million pots have been accessed since April 2015, and accessing savings early is ‘the new norm’ as 72% of those pensions belonged to people under 65.
However, the report also suggested the success of the freedoms so far depends on the fact that many of those who are accessing their pots are also members of DB schemes. According to the FCA’s research, of those who fully cashed in a defined contribution (DC) pension, 24% believed their DB scheme would be the main source of income in retirement.
Moreover the paper stated the median value of a DB scheme for 55 to 64 year olds between July 2012 and June 2014 was £161,600, whereas for a DC scheme it was just £25,000. No wonder then that the regulator has turned its eye to the suitability of DB transfer advice.
A key part of the FCA’s work on DB pension advice is its visits to advice firms, both large and small.
A freedom of information request submitted by New Model Adviser® revealed the regulator has visited nine firms as part of this work, although it initially considered 92 businesses.
Ex-FCA technical specialist Rory Percival, who is now a compliance consultant, recently described described the work as a multi-firm supervision exercise.
Percival said: ‘If [the regulator has] concerns from the files it has seen or maybe they are large players in the DB transfer market then it is going to see those firms.’
As part of this work, the FCA has visited firms that offer DB transfer advice services to other advice businesses, a process known as outsourcing.
These firms will make recommendations about the suitability of a DB transfer, or offer other services such as transfer value analysis (TVAS) reports for introducing advisers. In some cases these companies are carrying out thousands of pieces of advice.
In at least four recent cases outsourcing firms have agreed with the FCA to limit or stop their DB transfer advice.
In February New Model Adviser® revealed that international advice firm deVere UK agreed with the FCA to stop providing TVAS reports for third parties to carry out DB transfers. The firm was also issued with a section 166 review.
‘As one of the sector’s leading providers of overseas pension transfers to international clients, we fully support and welcome this review,’ a deVere spokesman said.
The FCA and deVere gave little information about why the restriction was put in place.
New Model Adviser® also revealed in June that Scottish adviser Intelligent Pensions, which was taking on outsourced DB transfers, had agreed with the FCA to suspend its DB transfer service. As one of the well-respected names in the market, this came as a shock to many.
Sources familiar with the case said the FCA was in part concerned over due diligence being done on the introducing IFAs, and specifically where the assets ended up following the recommendation.
Also in June, a subsidiary of Selectapension, Selectapension Bureau Services (SBS), announced it was temporarily stopping its DB transfer service following a visit from the FCA. The group is not stopping its TVAS service from Selectapension.
‘Please be aware that due to unprecedented demand, we are unable to accept new pension transfer analysis cases for a temporary period. We are working hard to rectify the situation as quickly as possible and apologise for any inconvenience caused,’ a note on SBS’ website read.
New Model Adviser® understands the regulator’s concern, as in the Intelligent Pensions case, was partly over the due diligence being carried out on the introducing firms.
A spokeswoman from Selectapension said the firm made the changes to its permission after an FCA review of its outsourcing partner CFPML, which provides a DB transfer service to Simplybiz advisers.
Peter Bradshaw, national accounts director of Selectapension, said SBS has carried out around 2,000 recommendations from 600 advice firms working with it.
‘If you are an adviser and you don’t have the requisite qualifications, what you would do is prime the client to say for this piece of advice I would refer you to a specialist firm,’ he said.
‘The case is then passed to SBS and it will deal directly with the client through email and by phone.’
Bradshaw said as the advice is the responsibility of SBS, it is its decision about which investments the client is placed into, if the client goes ahead with the transfer.
He stressed this was a ‘collaborative process’ with the introducing adviser and there will be dialogue about this between the two parties, but the ultimate decision rests with SBS.
Another firm that changed its DB transfer model was Heather Dunne IFA (HDIFA), which suspended its outsourcing service after the regulator highlighted concerns about its outsourced process.
‘The regulator has highlighted areas of an operational nature, specifically with how we deliver the advice process via introducing IFA firms, which needs to be adapted,’ Rich Fenech, director of Financial Solutions Midhurst, the principal of HFIDA, said.
The bigger picture
Each of these businesses used a different model for outsourced advice, and it is likely the FCA made individual recommendations to all the firms.
However, there are also similar features between all the cases that point to the regulator’s focus.
Percival (pictured above) said the regulator is concerned about the investments clients are placed into following a positive recommendation and how much the outsourcer knows about this.
‘The angle that might be an issue is what is going to be in the underlying pension?’ he said. ‘What funds are going to be selected? That is an area the FCA has long been concerned about; whether they are unregulated investments or whatever. So to the extent the outsourcer knows what those underlying investments are going to be, that would be an issue.
‘A concern would be if the outsourced firm doesn’t really know what it is going to recommend. If it is making a generic transfer recommendation on the basis of some generic funds that are not actually what the client is going into, that would be a very serious concern.’
The scale of the market will certainly raise issues about the compliance being undertaken. One outsourcing firm alone is working with 600 introducing IFAs, suggesting that details could be missed.
Another notable outsourcing firm is Tideway, which said earlier this year it is carrying out £50 million a month in transfers.
James Baxter, Tideway’s managing partner, said last year Tideway was using a system whereby it carried out the transfer for the introducing IFA and then passed the client back to the original adviser for ongoing investment advice. But amid concerns about the regulator’s stance it changed this model and now only carries out transfers if the client stays with it for ongoing investment advice through its own discretionary fund manager arm.
Tideway received a visit from the FCA as part of its DB transfer review, but the regulator did not take any immediate action against the firm. It appears the regulator may be more concerned about outsourcing if investment advice and transfer advice are not joined up.
Ex-Threesixty managing director Phil Young agreed with Percival that the regulator is uneasy about this connection between transfer and investment advice.
‘I think the nub of the issue is that basically these outsourcing firms have not been taking proper responsibility for the investment of the money,’ he said.
‘The outsourced DB transfer firm is responsible for the whole of the advice and not just producing the TVAS. Some of these firms are basically carrying out short cuts and focusing on how to write a quick report without taking full responsibility for the breadth of the advice.’
He added in some cases the outsourcer has ‘no idea’ where the investments are ending up after the transfer.
The regulator stressed the importance of having a joined-up approach in its alert published in January: ‘We are aware that some firms have been advising on pension transfers or switches without considering the assets in which their client’s funds will be invested. We are concerned that consumers receiving this advice are at risk of transferring into unsuitable investments or – worse – being scammed,’ the top lines of the alert read.
Across the board it is clear there are concerns about unsuitable recommendations, and even scams. The Financial Services Compensation Scheme said in its annual report last week that in the year ending 31 March 2017 it paid out to 3,565 consumers who received unsuitable advice to transfer out of occupations pensions schemes into ‘risky assets’ held within Sipps.
It is not just high-risk, unregulated assets that the regulator is concerned about when it comes to outsourced DB transfer advice. A recent review of the asset management market highlighted how high charges for underperforming funds are often a problem for investors. If a client is recommended to transfer out of their scheme, how much of their money will be eaten up by charges before they retire?
A key priority for the FCA is ensuring people do not run out of money in retirement, and that financial firms treat them fairly. The suitability of DB pension advice is important for both these priorities as the demand for transfers grows.
Already there have been warnings about what could go wrong. For example, Hargreaves Lansdown head of policy Tom McPhail warned in April that DB transfers could become a ‘mass mis-selling scandal’ in the future.
By telling firms that are responsible for so much DB transfer advice through outsourcing they need to tighten their processes, the FCA has shown it is able to take action to stop such a scandal emerging.