The defined benefit (DB) transfer advice market is undoubtedly in a transitional phase. Which way it will go is hard to determine but there are a couple of certainties – those clients who wish to consider transferring their valuable DB pension need good-quality, specialist advice and they need fully to understand what they are giving up.
While naturally wanting to meet the needs of their clients, many financial advisers have tried to introduce an in-house advice process for DB transfers. Some have done so successfully but others have struggled with the complexities involved in providing this sort of advice.
In the last year or so, a number of large schemes have restructured or are now looking to do, shining the spotlight on the quality of advice being provided around them. The Financial Conduct Authority (FCA) has ‘rightly’ launched a widescale review of firms offering DB advice, while professional indemnity (PI) providers look to take cover ahead of what they fear could be a ‘Pension Review 2′.
Early stages of the FCA review have already seen some major players in the market volunteer to suspend their activity in this area, highlighting issues in providing this ‘complex’ advice.
Whilst the FCA continues to provide additional rule changes and guidance in this area, it is vital firms stay up to date and constantly review their processes to ensure they are in line with the regulators requirements. Those providing advice must hold the necessary qualifications, while the development of the transfer value comparator (TVC) and Appropriate Pension Transfer Advice (APTA) will see a significant industry shift from the previous Transfer Value Analysis (TVAS).
The risk is that many firms, both big and small, will not be able to keep pace with the changing DB transfer landscape, resulting in either a voluntary exit from the market due to the cost of PI cover, or worse still, enforced regulatory exit, as a consequence of poor advice. Either way, this could leave a significant ‘advice gap’ with clients not knowing where to turn.
One other option, which is developing within the UK market, is the use of outsourcing in the context of transfer advice. Rather than being forced to exit the market, now may be the time to consider this as a viable option.
A hot topic in the recent FCA guidance concerns a ‘two adviser’ approach and the sort of impact this could have on the advice process. The regulator is clearly accepting of such a process – as long as the advisers work together to provide a consistent outcome for the client.
Responsibilities and liabilities
Both firms need to know where their responsibilities – and liabilities – lie, as does the client. Furthermore, the pension transfer specialist needs not only to review the viability of a transfer, but also the suitability of the recommended product and fund choice. Only then will it be considered a ‘personal recommendation’.
With growing industry concerns over contingent charging, it is more important than ever to demonstrate to the regulator that any advice provided is fully independent and the client is receiving the best advice possible without any bias towards a transfer.
As a business, if you outsource advice in this ‘high-risk’ area, it will likely have a positive impact on the cost of your PI cover and will allow the liability for the transfer advice to sit with the ‘outsourced’ company – always assuming they have the necessary FCA permissions.
While many firms may be considering running for the hills, rather than providing DB transfer advice, the option of ‘outsourcing’ such advice may be the missing piece of the jigsaw.
Craig Stokes is head of pension transfer advice at Pension Advice Specialists