Sententia articles July 2020

In this issue

So, what is the new advice benchmark for DB transfers?

A somewhat unique* situation has come about recently with the FCA writing directly to 7,700 ex British Steel scheme members and encouraging them to review their advice and initiate a complaint process if appropriate. That complaint should be directed towards their adviser in the first instance and if they’re not entirely satisfied with the response then to the Ombudsman...


The Contingent Charging Ban: Is Your Advice Suitable?

We have previously published articles on the regulator's proposals to ban contingent charging and now the regulator has finally delivered its awaited policy statement to the industry...


So, what is the new advice benchmark for DB transfers?

A somewhat unique* situation has come about recently with the FCA writing directly to 7,700 ex British Steel scheme members and encouraging them to review their advice and initiate a complaint process if appropriate. That complaint should be directed towards their adviser in the first instance and if they’re not entirely satisfied with the response then to the Ombudsman. 

*I say “somewhat unique” as this is not actually the first time; a previous letter had been sent to 4,000 members who had transferred out along the same lines.

The FCA has since introduced a webpage dedicated to all DB transferees, encouraging them to review their advice with a series of questions enabling them to judge if they have been the recipient of poor or incomplete advice.

Will the FCA repeat this D2C messaging with other transferees? We don’t know, but the regulator’s direction of travel is clearly laid out. What if the FCA wrote to everyone who had transferred out of a DB scheme?

One of the biggest adviser gripes has been the lack of detail and direction from the regulator as to what constitutes good and not so good DB transfer advice. This has inevitably created frustration and friction between the regulator and advisers. For balance, we have to be fair and recognise that we have had a series of consultations, some of which are ongoing, providing guidance and opinion over a sustained period.

Assessing Suitability Final Guidance back in March 2011 introduced Capacity for loss definitions and guidance. More recently we have more guidance in the form of:

  • Suitability 2 review which focuses on income in retirement advice (see this month's Guest Spot below from Just's Stuart Slegg)
  • Recent PS20/06 Pension Transfer rules (contingent charging ban etc) (see this month's article below on the contingent charging ban)
  • A series of comments from individuals such as Debbie Gupta and Andrew Bailey (then Chief Exec of FCA and now of Bank of England)

In the non-advice market, we are also seeing intervention with the introduction of Investment Pathways. These will help those DIY investors have more structure around their retirement investing and promote competition (against IFAs I wonder?) and value for money with a charge cap.

This is against a background of an increase to FOS liability which has jumped from £150k (for any complaints referred before 1 April 2019) to:

  • £355,000 for complaints referred to the FOS on or after 1 April 2020 about acts or omissions by firms on or after 1 April 2019
  • £350,000 for complaints referred to the FOS between 1 April 2019 and 31 March 2020 about acts or omissions by firms on or after 1 April 2019
  • £160,000 for complaints about acts or omissions by firms before 1 April 2019, and which are referred after that date

However, for complaints referred before 1 April 2019,  previous award limits apply of £150k. 

This approach has been really designed to ensure a higher percentage of SIPP claims are now captured and for the personal liability and responsibility of the SM&CR regime.

It won’t have escaped the attention of any firm out there that PI insurers have tightened up, with many seeing cover withdrawn going forward and the price of cover increasing alongside excess amounts.

While the above don’t necessarily follow one another like chapters of a book, it’s not difficult to see a running theme – the FCA is not satisfied with how the profession has handled DB pension transfers, especially since the introduction of Pension Freedoms back in 2015.

To underline this concern, we have this month seen the launch of the Defined Benefit Advice Checker service from the FCA. This is designed specifically for clients of advisers who have already transferred out of a DB scheme and provides a check list of areas which their adviser should have asked about. If the adviser is deemed not to have asked about them ALL, then they are encouraged to consider that the advice may not have been suitable and that a complaint may be the right course of action. These areas are, to quote the Advice Checker directly:

  • information about you and your family, and how much income you need to support your family during your retirement
  • information about you and (if relevant, your spouse/partner’s) employment, current income and spending, tax position, entitlement to state pension or state benefits
  • information about your health (and partner’s health, if relevant)
  • your and your spouse’s other pensions and assets or debts, and any dependency on state benefits (and partner’s details, if relevant)
  • your priorities and spending plans for your retirement
  • how much risk you felt comfortable with and the extent to which you were prepared to accept a reduced lifestyle in retirement if investments performed poorly

In addition to the above bullets, according to the Advice Checker the adviser should also ask about the understanding and knowledge the client has of DB and DC pension schemes and their risks and benefits to ensure the client understands what’s being given up. The adviser should also have considered how the client could achieve the retirement they wanted by keeping their DB scheme.

The advice checker also suggests poor advice was given where: 

  • The pension transferred was the client’s only or largest guaranteed pension, and they had few other assets to support them in retirement, apart from the state pension
  • the adviser recommended the client transfer and purchase a guaranteed lifetime income (an annuity), even though the client was in average or good health
  • the adviser did not show how the client could meet at least their essential income needs such as paying bills and rent from their DB scheme for their lifetime because they focused on one or more of the following:
  1. giving you flexibility and control of your pension 
  2. maximising the death benefits payable in the event of your death
  3. helping you achieve early retirement
  4. helping you take a larger tax-free lump sum

Other indications of possible poor advice according to the Advice Checker are:

  • where the client did not believe the DB scheme employer would continue in business, and their adviser did not show how their retirement needs might be met if the DB scheme was taken over by the Pension Protection Fund.
  • The client is now in a scheme, recommended by their adviser, where the charges their pay are much higher than they expected.
  • The adviser recommended the transfer to maximise the potential for good investment returns and did not show how income might reduce, not keep pace with inflation or not last for the client’s lifetime if investments returns were poor or charges were high.
  • The client is now in a scheme, recommended by the adviser, where  funds are invested in hotels or student accommodation, storage pods, leisure developments, parking schemes, forestry, precious metals/stones or other unusual investments.

The Advice Checker also flags up situations where the adviser recommended, in writing, that the client should not transfer but at the same time:

  • hinted they should do so anyway
  • did not explain the value of the existing DB scheme
  • did not explain the risks of a transfer
  • gave a list of the risks of proceeding with a transfer against advice without making these personal to the client

A quick link to the Advice checker site is here.

We would imagine the majority of advisers will look at this list and be satisfied themselves that all aspects have been considered while advising clients to stick, or transfer from their DB schemes, but does their filing show that all of these aspects have been not just considered, but discussed and understood? This is perhaps equally important. 

For any adviser who has previously advised clients on transfers out of Defined Benefit schemes, this is now the clearest and most direct indicator from the FCA on what good advice looks like. A client complaint only crystalises once a client decides to complain, or is prompted to do so by Ambulance chasers, or now the FCA. Advisers now have a choice to sit tight and hope these influencers don’t reach their clients, or to pro-actively review clients now and ensure the advice process and documentation is robust.

For many clients the options now available to them will be greater than when they transferred originally.  For example, specific decumulation investment strategies are now more prevalent and the ability to cover essential spending requirements with a guaranteed income for life is now available via the Novia SIPP.  These can be factored in and considered as options upon a review, changing the shape of the client outcome and original advice.  Some clients may discount this option, but even if they say “no” and it’s documented, then the client is likely to be much more comfortable with the original advice and ongoing service. 

The Contingent Charging Ban: Is Your Advice Suitable?

We have previously published articles on the regulator's proposals to ban contingent charging:

The Contingent Charging Ban – are you an advocate or an antagonist?

Contingent Charging - Would a ban be the thin end of the wedge?

…and now the regulator has finally delivered its awaited policy statement to the industry. This is a topic which has created significant debate. PS20/6 sets out the new rules that will ban contingent charging on Defined Benefit (DB) transfers, to bring about suitable pension advice for clients and to reduce conflicts of interest from an Adviser only being paid if the transfer goes ahead. From 1 October 2020 a recommendation to stay in a DB scheme must be charged at the same rate as a recommendation to transfer.  However, those who have agreed contingent charges and commenced advice work beforehand may charge contingently, providing a personal recommendation is given before 1 January 2021.

There are exceptions to non-contingent arrangements for vulnerable clients. The FCA has provided carve-outs for individuals in specific circumstances (reduced life expectancy to under 75 and serious financial hardship) with the aims of ensuring customers who are likely to benefit from a transfer are able to afford the advice necessary to make this happen.

Furthermore, the FCA have said that most consumers would not be materially harmed by remaining in their existing DB scheme and the carve-outs mean that only a small number are likely to benefit from a transfer but cannot afford advice.

Firms will also be expected to keep up to date records on those clients who meet the carve-out and should be prepared to evidence why these clients qualified for contingent charging.

Ongoing charges

The regulator recognises that even with a ban on contingent charges, high ongoing charges will still represent an incentive to recommend a transfer. They want to stop advisers from recommending expensive and complicated solutions that their clients do not really need. Their solution to this is to require advisers to now consider an available workplace pension as a receiving scheme for a transfer and, if they recommend an alternative solution, demonstrate why that alternative is more suitable by comparing the recommended receiving arrangement to the Workplace Pension Scheme (WPS) that is available to the client. Originally, they had consulted on challenging advisers to demonstrate that their proposed solution was at least as suitable as the WPS. But in the final rules they have upped the ante – advisers will need to show that the SIPP is more suitable than the WPS. This will likely include the adviser demonstrating that the client needs ongoing financial advice, which the WPS is unlikely to cater for.

Abridged Advice?

Only two outcomes can be advised under this process: remain in the scheme or that it’s unclear if a transfer is suitable or not.

This is a new level of advice, introduced to help clients access initial advice at a more affordable cost. It can recommend staying in the DB scheme but cannot result in a personal recommendation to transfer. It takes into consideration the personal circumstances of the customer, and so it sits on the advice side of the perimeter – but it can only look at the customer and the features of the existing scheme. If the adviser wants to incorporate the receiving arrangement into the recommendation, this will be full advice.