FCA details 'unacceptable' DB transfer advice failings

Once again, a considerable number of firms have failed to meet the Finanical Conduct Authority’s suitability requirements for defined benefit (DB) pension transfers.

Once again, a considerable number of firms have failed to meet the Financial Conduct Authority’s (FCA) suitability requirements for defined benefit (DB) pension transfers.

The regulator’s latest pension transfer work collated data from collected from 45 firms in 2018 and further assessment including file reviews and visited 18.

The findings highlighted that less than 50% of advice was suitable. It said that several firms failed to collect sufficient information on clients’ personal circumstances, such as other pensions arrangements or retirement plans. Where this information was collected, firm did not fully consider it when making a recommendation, the regulator found.

Here are the key failings the FCA found from 18 firms it looked at in detail. 

Once again, a considerable number of firms have failed to meet the Financial Conduct Authority’s (FCA) suitability requirements for defined benefit (DB) pension transfers.

The regulator’s latest pension transfer work collated data from collected from 45 firms in 2018 and further assessment including file reviews and visited 18.

The findings highlighted that less than 50% of advice was suitable. It said that several firms failed to collect sufficient information on clients’ personal circumstances, such as other pensions arrangements or retirement plans. Where this information was collected, firm did not fully consider it when making a recommendation, the regulator found.

Here are the key failings the FCA found from 18 firms it looked at in detail. 

Generic objectives in fact-finds

The FCA observed that the firms were relying on 'generic objectives' during fact finds with clients who wanted to transfer. This included using terms such as 'flexibility' or 'increase pension' without going into detail about what this meant to the client. 

It said firms were not asking 'whether the client is able or willing to take the risk required to achieve those objectives, or why they were prioritised ahead of the other needs and objectives of the client'.

Prioritising death benefits over other existing benefits 

The FCA said firms were putting too much emphasis on the inheritance tax benefits of a transfer. 

When someone dies aged before 75 they can pass on a defined contribution (DC) pension tax free. This does not apply to DB schemes, which are taxed at the dependents' marginal rate when passed on regardless of the age at which an individual dies. 

As a result some advisers have promoted transfers as the best way of passing on benefits tax free. However the regulator said this was not always the most suitable approach. 

Firms were 'prioritising the provision of ‘death benefits’ for spouses and dependants in the event of the client’s untimely death without exploring alternative options (e.g. existing DB scheme benefits or an insurance policy). Firms also failed to take into account the risk that the flexi-access funds could be depleted by the time of the client’s death.' 

Not exploring clients' reasons for seeking a transfer 

The regulator highlighted how firms were not doing enough to understand why a client actually wanted to transfer. 

It said firms were using 'generic objectives to justify a transfer, without obtaining the necessary information about those objectives'.

Firms were 'basing a recommendation on the client’s objective to take control of their pension without exploring the reasons for this. This prevents the firm adequately assessing whether the client is able or willing to take the risk required to achieve their objectives'.

 

Failing to understand clients' income and expenditure 

According to the FCA too many firms were not considering how much clients were spending or had coming in before making personal recommendations.

The FCA listed two examples where advisers were not considering clients' financial circumstances in full:

  • 'recommending that clients use their lump sum to repay debt or buy a property without obtaining details about the amount needed or exploring alternative finance options';
  • 'assuming that the client wants or needs a similar income to what they are currently earning, instead of obtaining details on what retirement plans the client actually has or what their income needs are likely to be in retirement'.

Not considering sustainability of income

Some firms were 'failing to take into account longevity prospects beyond average life expectancy to inform an assessment of the sustainability of income'. 

In other words the regulator was concerned that advisers had not considered what happens when a client lives longer than expected after transferring their pension.

Failing to adequately manage clients with competing objectives

Firms did not think about how achieving one objective for a client might affect their ability to achieve another. 

For example, the FCA said that a client who wanted to access their 25% tax free lump sum could be recommended a transfer even though this would damage their potential to achieve 'desired or required income' throughout retirement. 

The regulator also listed 'recommending a transfer because the client wanted immediate cash and income in retirement and to leave death benefits to their heirs without considering or demonstrating to the client the impact that achieving one objective may have on the client’s other objectives' as an issue it found with transfer advice. 

 

Failing to consider charges after a transfer

The FCA found evidence that advisers did not look at how charges might affect a client's income after a transfer. 

'In some cases this led to firms recommending clients invest in schemes where the aggregated charges had the potential to negate future investment returns so the client was unlikely to financially gain by transferring and had a high risk of being worse off,' it said.

The regulator also said firms were not considering how other pension schemes could be used to meet an objective or how the client's actual health might differ from their perceived health based on 'early deaths of family members'. 

 

Recommending the transfer of more than one scheme where it may not be necessary

The FCA said that firms were 'recommending clients transfer multiple DB schemes without considering whether the client only needed to transfer one scheme to meet their objectives'.

 

Failing to assess risk against benefits

Many of the 18 firms were 'failing to assess, or using flawed methods to assess, the risk the client is willing to take in relation to their benefits,' the FCA said. 

It added: 'in particular, we saw firms relying on investment risk assessment tools which were not designed to assess the specific risks associated with transferring from a defined benefit scheme. Where transfer risk was assessed, we saw some firms using unbalanced language which was likely to steer clients to respond in a certain way.'

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