June 19, 2019

June 18, 2019

Subscribe to Latest Legal News and Analysis

June 17, 2019

Subscribe to Latest Legal News and Analysis

FCA – “Unacceptable” Low Levels of Suitable Pension Transfer Advice

The FCA’s latest update on its review of pension transfer advice does not make for happy reading.

The stats

As part of its ongoing review of the pensions transfer industry, the FCA reviewed advice on 154 transfers made by 18 firms (out of a total of 48,248 potential transfers advised on by these firms in the period under review). Just over 50% of the total transfers advised on resulted in actual pension transfers, though the FCA has made clear that it “expect[s] advisers to start from the position that a pension transfer is not suitable”.

Of the advice analysed, the FCA found that:

  • 48.1% were suitable (74);
  • 29.2% were unsuitable (45); and
  • 22.7% were unclear (35).

The FCA acknowledged that a part of these figures came from four firms who have subsequently ceased providing pension transfer advice or varied their business models, and that the review is not representative of the whole market, being targeted at particular firms. Leaving those four firms out improves the statistics somewhat (60% of advice being found to be suitable), though it still leaves considerable room for improvement.

It remains to be seen from the next phase of the FCA’s review work whether these statistics are borne out across the industry as a whole.

What does the FCA say is going wrong?

The FCA says it observed the following key issues:

  • Firms failing to identify and mitigate risks associated with pensions transfer business.
  • Senior management lacking understanding of the business or failing to adequately oversee advisers’ activities.
  • Insufficient understanding and management of conflicts of interest caused by charging structures.
  • Risk management and resources lagging behind increased volumes of work.
  • Firms adopting commoditised processes and so taking inadequate account of individual customer needs.

Where the proportion of suitable advice was low, the FCA identified this was driven by the following:

  • Failing to obtain sufficient information about clients’ needs and circumstances.
  • Failing to consider clients’ needs and objectives alongside one another, and using generic objectives which were not sufficiently specified to the client.
  • Making inadequate assessments of the risks clients were willing to take.

The FCA’s update also gives a number of more specific examples of how the advice it reviewed fell short.

The FCA also highlights failings in disclosures to and communications with clients. This comes partly from firms adopting inadequate standard documentation, notably in the way fees are communicated. It also stems from using unclear, emotive, or, in some cases, misleading language.

However, where firms had recognised the higher risks of defined benefit pension transfer business and put in place additional controls, the FCA saw a higher rate of suitable advice. Pension transfer advice is set to remain an FCA focus for some time to come.

What next?

The FCA has published a significant amount of guidance over the past year or so on its expectations for firms operating in this area and detailing how some firms are currently failing to meet expectations. This provides a roadmap to avoiding non-compliance.

Data has already been requested by the FCA from all firms with permissions to advise on defined benefit pension transfers. The FCA has indicated that it “will not hesitate” to use its investigatory powers where there are findings of serious misconduct and that “serious consequences” can be expected where the FCA’s concerns are not taken on board.

To avoid attracting negative attention from the FCA, firms should be taking steps now to review existing systems and controls in the light of the FCA’s latest findings and guidance. We are continuing to advise a number of firms in this area.

© Copyright 2019 Squire Patton Boggs (US) LLP

TRENDING LEGAL ANALYSIS


About this Author

Partner

Chris Webber specializes in resolving financial services disputes and regulatory investigations. He represents clients including banks, broker dealers, corporate trustees, bondholders, issuers, mortgage servicers, borrowers, insolvency office-holders, regulatory bodies, investment funds, and individuals. He also acts for corporate clients in contractual, investment, and shareholder disputes.

+44 20 7655 1655