Seven steps to suitable DB transfer advice

Advisers might be surprised to learn many default assumptions in cashflow planning models are not compliant with FCA transfer rules. But this is just one common pitfall

With a rising demand for advice on defined benefit (DB) transfers and increasing regulatory attention, firms want to check whether their processes are robust.

When we review a firm’s DB transfer process at threesixty, we constructively challenge the firm and identify key risks. Click on for some of the most common.

With a rising demand for advice on defined benefit (DB) transfers and increasing regulatory attention, firms want to check whether their processes are robust.

When we review a firm’s DB transfer process at threesixty, we constructively challenge the firm and identify key risks. Click on for some of the most common.

Triage service

The issues surrounding triage have been well publicised in recent months. However, some firms still have processes that could be deemed to be crossing the boundary and straying into giving advice.

A true triage service is where a firm has an initial conversation with a potential client, giving them sufficient generic information about safeguarded and flexible benefits. This enables them to make a decision as to whether to seek advice on the potential transfer (or conversion) of their benefits. 

To reduce the risk of crossing the advice line, it is recommended no client-specific information is considered as part of this process.

Written process

While many firms have written processes specifically relating to DB pension transfers, others do not, or, most commonly, have not reviewed or updated their processes for some time. Given the significant changes in recent months, a firm is expected to have up-to-date written processes at all times.

These must be understood by relevant staff, and evidence a strong awareness of regulatory developments. 

Adviser remuneration

There is a potential conflict of interest posed by some firms’ charging structures, for example, where the adviser charge is contingent upon the transfer taking place. Therefore it is important to ensure staff are not incentivised to act in ways that are detrimental to the best interests of clients.

The Financial Conduct Authority (FCA) expects firms to have systems and controls in place to identify what risks a remuneration scheme might entail and how a firm manages these risks. The firm’s remuneration scheme should be documented and reviewed periodically.

Cashflow

The use of cashflow tools is becoming increasingly popular, and these are useful within the transfer process. But it is important to ensure the users fully understand how to use them, the underlying assumptions used, and the limitations of the tool.

Due diligence should be documented and regularly reviewed to ensure the tool(s) remains fit for purpose. The default assumptions in many models do not currently meet the regulatory requirements set out in the regulator’s Conduct of Business Sourcebook 19 Annex 4C on pension transfers, conversions and opt-outs.

Professional indemnity (PI) cover

Firms active in DB transfer advice are experiencing changes to the terms of their PI insurance policy at renewal. Often it is not only the premium that is increased but also the level of excess.

Insurers are also including specific exclusions, such as: limiting the number of members in any one scheme that can be advised, excluding specific pension schemes, and excluding insistent clients.

Financial resources

It is imperative for firms to fully understand the implications of increased excesses and exclusions on their regulatory financial resources requirement. This can be a complicated area that frequently causes confusion.

Firms will be required to hold additional own funds in addition to the minimum requirements. These funds must be readily realisable within 90 days.

Specialist sign-off 

Firms often mistakenly believe a pension transfer specialist (PTS) signature on a client file is sufficient to evidence the advice has been signed off.

The file should evidence the PTS has: checked the entirety and completeness of the advice; confirmed any personal recommendation is suitable for the retail client in accordance with the FCA’s ‘assessing suitability’ and ‘working with another adviser’ requirements; and confirmed in writing they agree with the proposed advice before it is provided to the retail client, including any personal recommendation.

Rebecca Ferrier is business risk consultant at threesixty

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