The Financial Conduct Authority (FCA) has defended the controversial transfer value comparator (TVC) process for defined benefit (DB) transfers in its Live & Local seminars, New Model Adviser® can reveal.
The regulator is hosting a series of interactive workshops on defined benefit (DB) transfer advice across the UK, in a bid to address widespread concerns in the market.
In one part of the workshop, FCA sets out its intentions behind the TVC, which replaced the critical yield aspect of the previous transfer value analysis (TVAS) requirement from the 1 October.
The TVC has come under fire from advisers and regulation gurus alike, largely due to the calculation methodology relying on a risk-free growth rate, which advisers say generates deceptively large figures and confuses clients.
In its slides, the regulator claims the TVC shows that 'annuity is the best proxy for lifetime income', and elucidates the underlying value of benefit the client might give up.
The FCA adds that the TVC 'puts important context around the CETV' and that 'it's not just about the numbers'.
The presentations are also honing in on advisers' know your client (KYC) and appropriate pension transfer analysis (Apta) processes.
In slides seen by New Model Adviser®, the regulator states its learning objectives for advisers as understanding the 'information gathering framework required to provide compliant DB advice', gaining clarity on the FCA's expectations on Apta and understanding the regulator's approach to DB recommendations.
The agenda sets out why DB advice is an FCA priority, before moving through sections on triage services, KYC, Apta and 'recommending a suitable solution', interspersed with two interactive case studies.
Attitude to transfer risk
The workshop features extensive focus on assessing 'attitude to transfer risk', drawing advisers' attention to:
- the risks and benefits of staying in the ceding arrangement and transferring into an arrangement with flexible benefits;
- the client's attitude to certainty of income in retirement;
- whether the client is likely to access funds in an arrangement with flexible benefits in an unplanned way;
- impact on the sustainability of the fund over time;
- the client's attitude to and experience of managing investments or paying for advice;
- the client's attitude to any restriction on the ability to access funds in the ceding arrangement.
Advisers are presented with a spider diagram of 14 factors to consider as part of carrying out KYC on the client's DB ceding scheme, as well as a flow chart in how to prioritise clients' objectives and needs.
The FCA clarifies that the Apta is not a 'tick box exercise', and has 'no specific disclosure requirements' but 'can be used to illustrate other scenarios'.
The presentation highlights that the Apta does not mandate cashflow modelling, but needs 'consistency of presentation'.
The FCA takes advisers through three scenarios, one focusing on death benefits, one on early retirement and one on ill-health, setting out the considerations which should form part of the Apta in each case.
It then requires advisers to present their own recommendations for each case and justify them, before outlining a further list of factors which could 'change the thinking behind the Apta'.
These include terminal ill-health, the client losing a job and entering mortgage arrears, speculation in the press about a firm being in financial difficulty and the scheme allowing a partial transfer, among others.
The regulator has now gathered data from every firm in the country with permission to advise on pension transfers, having recently highlighted that files it has reviewed so far from 18 firms demonstrated less than 50% suitability.