DB transfer advice: FCA moves to scrap ‘unsuitable’ starting position

Contrary to its current rules, which state a DB transfer needs to be presumed to be unsuitable before giving advice, the regulator said it has recognised pension freedoms meant transfers could be suitable for some consumers.

In a consultation out on Wednesday, the FCA proposed to replace the starting assumption with a statement in the regulatory handbook saying that for most people “retaining safeguarded benefits will likely be in their best interests”, alongside guidance “that advisers should have regard to this”.

The regulator warned, however, its proposal “does not represent a softening of our approach”.

Personal Recommendation

The FCA has also proposed all DB transfer advice must be based on a personal recommendation.

An assessment of an individual’s circumstances and a specific recommendation are required for transfer advice to be “meaningful”, the regulator said.

The FCA will also look to publish extra guidance for advisers on transfers. It said will help advisers to consider the following factors:

• the client’s income needs and expectations and how these can be achieved, the role safeguarded benefits play in providing this income and the impact and risk if a conversion or transfer is made;
• the specific receiving scheme being recommended following the transfer and the investments being recommended within that scheme to ensure that it is appropriate for the risk profile of the client;
• the way in which the funds will be accessed, either immediately or in the future, including follow-on arrangements
• alternative ways of achieving the client’s objectives. For example, there may be ways for a client to provide death benefits which can be funded from income rather than by a lump sum funded by a pension transfer, and which does not carry so much risk;
• the relevant wider circumstances of the individual.

Changing TVA Rules

The financial watchdog has also proposed replacing the current TVA requirements with a comparison of the value of the benefits being given up.

“Taken together as a package, the proposals will ensure that advice fully takes account of an individual’s circumstances so that consumers make the right decision for them,” it said.

“However, we recognise that the environment has changed significantly, so we want to ensure that financial advice considers the customer’s circumstances in full and recognises the various options now available to them.

“Our new approach should better equip advisers to give the right advice so that the consumers make well-informed decisions.”

The FCA said it will measure the success of its proposals by whether they result in:

• a reduction of complaints against advisory firms;
• fewer interventions by the FCA in the area of transfer;
• fewer consumers becoming the victims of pension scams;
• and greater certainty and confidence among advisers as to the expectations for transfer advice.

Last week the FCA confirmed it was looking into certain firms that have increased the volume of DB transfer business. It said this was not part of a separate review but was ongoing supervisory work.

In January the regulator warned advisers not to execute transfers without considering where the relocated assets will be invested, citing concerns consumers who received transfer advice were at risk of transferring into unsuitable investments or being scammed.

The regulator is taking comments on the proposals until 21 September. It will publish its resulting Policy Statement in early 2018.