The Financial Conduct Authority (FCA) has published guidance on advising defined benefit (DB) transfers and has reiterated its stance that it is best savers do not transfer out of final salary pension schemes.
The FCA originally published a draft guide in June last year but this finalised version contains some amendments. However, the regulator said it is proceeding with the guidance “largely as consulted”.
In an update published on Tuesday (30 March), the FCA said: “It remains our view that it is in the best interest of most consumers to stay in their DB pension. Where an individual seeks advice to transfer, we expect firms to give advice that is suitable and appropriate for their needs and situation.”
It said the guidance will help firms to identify any weaknesses in their existing processes so that they can put into place an appropriate framework for managing and delivering suitable advice.
It outlines what it expects advisers to do who are advising on DB transfers and outlines what it would deem as good and bad practice.
For example, one area discussed in the report is conflicts of interest; it said a firm must manage conflicts of interest fairly, both between itself and its clients and between different clients.
When giving DB transfer advice, the FCA said, firms should be particularly aware of, and manage, conflicts of interest where the firm’s interest in the outcome of a service provides to the client is separate from the client’s interest in that outcome.
The below outlines what the regulator believes to be good practice and bad practice when considering conflicts of interest:
Proper levels of professional indemnity insurance (PII) cover was also highlighted in the finalised guidance.
The FCA said: “We are concerned some financial advisers do not hold adequate financial resources and/or do not have compliant PII for the business activities they carry out. Without adequate financial resources and compliant PII cover in place, firms risk being unable to put things right where they have caused harm to consumers.”
It added firms must maintain adequate financial resources, including PII for past and current business where there is no break in cover.
“If a firm does not have the necessary cover, we expect them to stop all relevant regulated business, including DB transfer business,” the watchdog said.
It also warned advisers on the use of introducers during the process.
“If you are giving both DB transfer advice and recommending where transferred funds could be invested, you should not let an introducer influence the investment choice,” the guidance said. “If you do, you may be held responsible and subject to regulatory action.”
The FCA warned while most authorised introducers use mainstream investments, we have “specific concerns where the use of introducers involves moving pensions to unregulated, high risk, illiquid products, whether based in the UK or overseas”.
A section on good practice when dealing with introducers said when an authorised firm receives referrals from unauthorised firms that are not professional services firms such as accountants or solicitors, it should not to rely on the client information they provide.
“As part of its due diligence process, the firm always contacts the client to verify the information set out in the fact find and carries out its own risk profiling assessment,” was cited as good practice.
Support for employers and trustees
The FCA and The Pensions Regulator have also published a guide for employers and trustees, which set outs what they can do to help members with financial matters without needing to be FCA authorised.
The FCA said: “The publications are part of our ongoing focus on defined benefit pension transfer advice. We are also taking significant supervisory and enforcement action where firms have not met the standards of advice and behaviour expected when giving DB transfer advice.”