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Opinion
Regulation

Regulation - Defined benefits

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Open-access content Tuesday 22nd September 2020 — updated 10.57am, Friday 27th November 2020
Authors
Rory Percival
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Rory Percival highlights some of the key issues arising from the FCA’s recent Guidance Consultation on DB transfers

Many in the market have questioned what the Financial Conduct Authority (FCA) believes is suitable advice and what the issues are with poor defined benefit (DB) transfer advice. Well, now you know – it is all in the Guidance Consultation (GC).

I strongly recommend all advisers – not just pension transfer specialists – read the majority of the GC, in particular the client-facing material (chapters three to six), as it is packed with essential information that applies to advice generally.

It states: “Staff at some firms appear to think the problem of unsuitable advice lies elsewhere and not at their own doorstep”. This is a clear indication that the problems the FCA sees are not limited to a small number of ‘dodgy’ firms; it is much more widespread than this. This means it also applies to firms – perhaps like yours – where you have an excellent culture and attitude.  

Needs vs wants

The paper clearly distinguishes between needs and wants. Clients need an income throughout retirement. They might want flexibility and death benefits. Needs outweigh wants. You should prioritise needs first and, only if these have been achieved, can the wants be addressed. The lack of observance of this sensible approach, I suspect, has resulted in most of the unsuitable advice cases.

Another key takeaway is the good practice examples. Here, it is not only the general nature of the example that the FCA considers good practice, it’s also the detail. So, when deciding which types of client not to engage in the advice process, look at the examples in paragraph 3.13. Look at paragraph 2.48 for what to include in your continuing professional development (CPD), etc. And, conversely, use the poor-practice examples as a checklist for what you do to ensure you don’t do them. For example, check your website (and guides) and avoid including anything in paragraph 2.53. This is really useful detail you can use to benchmark your firm.

More broadly, what comes across in the paper is that some advisers have forgotten some of the basics of good financial planning – basic fact-finding skills, using open questions, dealing with an individual, prioritising needs over wants, challenging the client where necessary, impartial research and due diligence, etc. Some – a lot – of the paper comes across as basic good sense; you might think ‘this is obvious’ when reading it. But the point is that the comments and examples in the paper are what the FCA actually sees in practice. So, what needs to be done?  

The problems the FCA sees are not limited to a small number of ‘dodgy’ firms; it is much more widespread than this. This means it also applies to firms – perhaps like yours – where you have an excellent culture and attitude

Moving forward

I am sure that most advisory firms can draw benefits from the GC. Undertaken robustly, adopting the approaches set out in the paper is just as likely, if not more so, to improve the quality of advice than the ban on contingent charges and the other handbook changes in the Policy Statement. The FCA has often said that the main issues it has seen in DB transfer advice are basic; this GC sets these out in detail. Read, use, implement.

But will you? Will advisers? I have been in the sector for more than 30 years and poor record-keeping on client files has always been an issue. We call ourselves a profession and we can’t even keep a decent file? Surely this should be a hygiene thing; you just do it, routinely.

So, how do you get people (advisers) to do something they consistently fail to do? I generalise, of course – maybe your files have plenty of colour and detail about the client’s circumstances and objectives – but this is clearly still a widespread issue in the sector.

It is going to be hard to deal with an issue that is quite so entrenched in the sector. Perhaps one way to think about this is short term, long term, and accountability. In the short term, you need to address deficiencies with individual advisers. This is likely to need to involve stiffer sanctions or actions, as the approach you have been taking before is not working. The other short-term action is to review your fact-find document(s). Are you asking the right questions (the GC can help here)? Are there adequate spaces for sufficiently detailed answers?

In the longer term, look at the culture at your firm. Instil the view that ‘this is the way we do things around here’. And focus on the paraplanners too. Empower them to challenge advisers.

Finally, accountability. The Senior Managers Regime is now in force and formalises the expectation of the FCA for firms to have individual senior managers accountable for the activities within the firm. Accountability sits within the operations of the firm, not ‘outside’ in the compliance function. So, accountability for file standards sits with the head of advice and he or she should be driving change in this area, not the compliance function.  

Actions

I think it is inconceivable that advisers and firms will not benefit at least in some way by reading the GC. From a firm’s perspective, read the paper forensically and use it to benchmark, update and refresh your approach, not just on DB transfers but read across to other areas of advice too.

Advisers should also examine the client-facing sections (chapters three to six). Make sure your fact-find is up to scratch and consider financial or other ways to improve file quality. And consider how to instil the right culture in the long term.

Rory Percival of Rory Percival Training & Consultancy Ltd

PFP_Autumn 2020
This article appeared in Issue number PFP 1, AUTUMN 2020 of Personal Finance Professional .
Click here to view this issue

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