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Adviser reluctance to transact pension freedom business – such as defined benefit transfers – could result in consumers losing confidence in the reforms and it’s up to the industry to work out the best way forward, the Financial Conduct Authority (FCA) has warned.
The regulator agreed the freedom and choice reforms, which came into operation in April last year, had increased adviser apprehension when dealing with certain types of pension transaction or insistent clients.
The FCA said it had heard from several respondents who flagged concerns about professional indemnity insurance and the Financial Ombudsman Service in relation to dealing with insistent clients.
However, it added this perceived reluctance created a risk that “consumers will lose confidence in the ability of the industry to deliver on the promises of pension freedom”.
It said it would consider future regulatory guidance on the issue but in the meantime it urged the industry to come up with its own solution.
In a policy statement, it said: “While some of these issues have been around for a long time, we acknowledge that the introduction of pension freedom has increased apprehensions of advising and transacting in some cases.
“This does create a risk that consumers will lose confidence in the ability of the industry to deliver on the promises of pension freedom.
“While we consider whether there is a need for us to undertake more work in this area we believe there is a responsibility upon the industry itself to consider how it can deliver on customers’ expectations.”
Pension reforms – feedback on CP15/30 and final rules and guidance (PS16/12) comes in response to the regulator’s consultation on pension freedom rule changes released in October last year.
It asked for industry views on a wide range of issues such as pension transfer advice, insistent clients, enhanced transfer value exercises and communicating with consumers when they choose to transfer out of defined benefit pension schemes to take advantage of pension freedom.
Starting point
Back in October, it asked for opinions on whether the starting point for pension transfer transaction advice – whether it is in the client’s best interest to transfer – should be changed.
Many argued it should but the regulator said it was against any alterations.
The regulator said it expected to undertake further work on pension transfer rules but added: “We do not see any case for moving away from client’s best interests as a starting point for advice.”
However, some respondents argued the starting point was in opposition to the ethos of pension freedom.
The paper explained a slight majority of those responding thought that the starting assumption should be removed.
“Some of these thought that the current approach is inherently flawed in the context of pension freedoms and that the regulatory framework should not create a barrier to consumers wanting to take advantage of the pension freedoms created by legislation.
“It was also suggested that, from a practical perspective, it is impossible to meet the current requirement of proving that a transfer is in the client’s best interests (as opposed to being very likely) as the outcomes are inherently uncertain, making any recommendation a probabilistic one with a range of possible outcomes.”
The paper added: “There were also views that the inherent principle of flexibility within pension freedoms changed the definition of ‘best interests’ overnight.”
The FCA said a number of respondents thought having more flexibility over how to access pension pots was a “valid client objective in the new legislative environment” which, for the adviser, means more subjective judgement, balancing a broader range of considerations and taking into account the complexities of a client’s desires and lifestyle aspirations and well-being, “not just whether a transfer makes economic sense”.
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