Rory Percival examines the supervisory work that the FCA has been undertaking on DB transfers and speculates about what will happen next
The Financial Conduct Authority (FCA) has been looking at the defined benefit (DB) transfer market since 2015 and has undertaken extensive supervisory work. It is now on its fourth round of thematic work in this high-priority area. It has published two supervision updates in relation to its work and findings.
In October 2017, the FCA published its findings from early supervisory work. It undertook a desk-based review of 22 firms, reviewed files from 13 and undertook visits to 12. Subsequently, four firms chose to stop advising on DB transfers. This usually occurs when the FCA suggests this to the firm because it has significant cause for concern.
As part of this work, it undertook 88 file reviews, with the findings as follows:
These figures compare unfavourably with the results from the Assessing Suitability Review (the representative review of the market in 2015), where 91% were found to be suitable. The main findings related to situations where the DB transfer advice was outsourced to a third-party specialist firm. The key problems were:
- A lack of information-sharing between the introducing firm and the specialist transfer firm, hence the specialist firm did not have enough information about the client’s objectives, needs and personal circumstances
- The transfer specialist made a recommendation without knowing where the transfer proceeds would ultimately be invested
- Inadequate specialist transfer or compliance resources to deal with the increased number of referrals.
In December 2018, the FCA published a further update and the tone of this appears to show frustration that standards had not improved adequately. It had undertaken a desk-based assessment of 45 firms and then visited 18. It appears that the 18 firms were a combination of firms with significant levels of DB transfer cases and those where the desk-based review had highlighted concerns. The file review findings are therefore not representative of the market as a whole:
Following these assessments, a further two firms voluntarily ceased providing pension transfer advice and a further two surrendered their pension transfer advice permissions.
The problem areas are listed in the notice and anyone involved with DB transfers should read these in detail. This is because the failings are extensive and generally very basic in nature, such as: inadequate detail about the clients’ personal circumstances and objectives; failure to consider alternative ways of meeting the clients’ objectives; and failure to manage trade-offs, among many others.
Towards the end of 2018, the FCA sent out a data request to all firms with DB transfer permissions on business undertaken since 2015. This is to build a market-wide view. It will also allow the FCA to target firms where there are indicators that there may be issues. For example, it has asked about the numbers of cases where the solution costs more than 1.5% pa (excluding adviser charges), so it may target firms where there are significant numbers of more expensive pensions.
Also, it may focus on firms that have seen a significant spike in DB transfer cases. There are a number of other areas that may provide indicators. This will allow the FCA to focus on potential problem firms during the course of this year.
However, the FCA, at some point, needs to stop undertaking supervisory work on DB transfers; it cannot go on indefinitely. But it cannot stop unless standards have improved adequately – and we are not seeing much sign of this currently, certainly not if you look at the issues found in the December 2018 notice. To know if the market has improved adequately, it needs to know what the market – on average – is doing. It will not achieve this by focusing on the riskier firms highlighted by the data request, as these will not be representative of the market as a whole. To get an average market view, the FCA will need to review cases selected more randomly.
The FCA has stated that it will be undertaking Assessing Suitability Review 2 (ASR2) in 2019, making an assessment from all investment and pension cases in 2018. This will be a market view and I suspect the FCA may increase the proportion of DB transfer cases in this review, to achieve adequate numbers to take a view on the DB transfer market.
But even here there is a problem. ASR2 will look at 2018 cases and the policy development only took effect during the course of 2018, mainly in October, so there will not be a chance for the full effect to play into advice. Hence, I suspect the FCA will undertake further, random, DB transfer work in the latter half of 2019 or early part of 2020, on early 2019 cases, or alternatively defer ASR2 to look at early 2019 cases, to be able to obtain comfort that standards have improved adequately.
In conclusion, if standards do not improve significantly now, then FCA work on DB transfers will continue through 2020, into 2021 and maybe longer, and we may also see further policy changes.
Rory Percival of Rory Percival Training & Consultancy