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Defined Benefit Pension Transfer Advisers Beware: Clear and Repeated Warnings

18 January 2019
We discuss the FCA warnings to DB Transfer advisers highlighting some of the key considerations; practical steps to addressing FCA concerns and ways to re-mediate problems where identified. 

Defined Benefit Pension Transfers have long been in the FCA's crosshairs. The FCA's latest warning (December 2018) is particularly stark and we expect to see increased enforcement action in the next 12 months.

At the start of 2018, the FCA reassured the Work & Pensions Select Committee that it had already referred 14 pension advisory firms to its enforcement team. This number has almost certainly increased throughout 2018. The latest announcement notes that the FCA requested data from every firm with permission to provide DB transfer advice and that the FCA will this "year start a wide-ranging programme of activity with firms. Firms should ensure now they have taken onboard the issues we have identified…. We will not hesitate to take action against any firm that continues to present harm to consumers".

In this context, we set out a number of key considerations and red flags to help firms identify where a problem may exist and a number of practical steps firms may want to take.

Key Considerations / Red Flags

As part of its latest warning, the FCA has specifically highlighted that:

  • It expects advisers to start from the position that the pension transfer is not suitable. Its data request focuses on the proportion of clients recommended to transfer. Any firms who find themselves advising that a transfer is suitable more often than not would be raising a significant red flag (albeit a 'triage' service may skew the statistics);
  • It is important to look at transfers from both perspectives. The FCA says it saw examples where a transfer was not recommended, despite it being suitable for the client to have transferred;
  • It found senior management failings, which should put senior managers on notice with the upcoming SM & CR;
  • It would be a concern if there was a marked increase in the number of DB transfer advice cases without a corresponding increase in the risk and compliance resourcing within a firm;
  • It is vital that firms understand the importance of being client-centric in DB transfers. Many failings result from reliance on generic 'copy and paste' reasoning for transfers and a lack of consideration of the client's specific needs;
  • As with investment suitability, the fact find is crucial and very much linked to client-centricity. If on reviewing a file there are obvious questions as to why a client wants to pursue a course of action, how a recommendation will affect the client or a contradiction within the file that has not been adequately explained, it is indicative that the fact find has not been satisfactorily completed. This could subsequently lead to questions as to whether the outcome was suitable for the client.

Practical Steps

There are a number of considerations that firms will want to consider, including: 

  • Checking and Updating Internal Processes: A firm should have a number of processes in place to ensure it complies with regulatory requirements when providing DB transfer advice. These policies should be properly reviewed to ensure they comply with the evolving regulatory requirements. Obvious policies to consider include:
  • Suitability: simply put, what is the firm's process for ensuring that DB transfer advice and reports are suitable for clients and include all the required information? Has this process taken into account the updated FCA guidance and rules? Do the processes follow good industry practice and avoid the common pitfalls?
  • Insistent Clients: Does the firm have a specific policy for insistent clients which complies with COB 9.5A? This is a high risk area that firms often get wrong, particularly where (as with DB transfers) clients are required to take advice.
  • Risk Management Processes: A firm must have proper risk management processes in place. A firm should consider if it sufficiently ensures appropriate client outcomes are achieved, including complying with regulatory requirements. A firm will also want to be able to demonstrate that these policies are complied with on a day to day basis. Impressive policies that are not followed do not provide much assistance to firms. Steps that firms could take to demonstrate or establish compliance include 
    • Audit/File Reviews: Both pre- and post-advice reviews should be considered. Once a transfer has taken place it is unlikely to be reversible, so firms should consider what checks they need to put in place (perhaps over and above the requirement that advice is given or checked by a pension transfer specialist) prior to a transfer taking effect.
    • Increased Compliance Resourcing: A firm may have all the required policies (and kept them updated) but lack the resources to implement and follow them. Firms should honestly assess whether they have sufficient compliance resourcing (both internal and external) to comply with regulation and their own policies. Inadequate resourcing can be seen as an aggravating factor by the FCA as it highlights a firm knew it needed to do something but failed to do so, often knowingly
    • Improved Compliance Technology: Similarly, sufficient compliance resource is not always measured in head count alone. There is technology being developed all the time which can help push efficiencies and extend the capabilities of even a modest compliance function.
    • Remediating Identified Issues: It is vital that a firm adequately remediates issues with process and individuals as soon as they are discovered, both on a forward and backward looking basis. This will be all the more important once the SM&CR is in force as those with oversight may be held personally liable for failing to put things right.
  • Identifying Systemic Issues: A firm is required to consider (through root cause analysis etc.) whether it needs to remediate (and how) any systemic issue it identifies. Firms need to be alert to this issue. If a firm identifies a failing in a process, there is a chance that this issue, by its very definition, will be a systemic failing. A firm should investigate this to determine the extent of any potential issue. If a systemic failing is identified, there are various ways in which a firm may seek to remediate, all of which are fact sensitive and include:
    • Full Past Business Review: In extreme cases, where there are significant systemic concerns throughout an entire book of business, a firm may carry out a full past business review (akin to a voluntary 'skilled persons' review).
    • Targeted Past Business Review: where there is a potentially systemic issue limited to a small number of factors or scenarios, a firm may carry out a targeted past business review. For example, a firm identifies that one of its advisers has made a number of unsuitable recommendations. As the unsuitable recommendations only arise from one adviser, there is no obvious need to conduct a full past business review. A firm can then carry out further analysis which may identify other factors which can be used to reduce the cohort whose files need reviewing.
    • Client Opt-In Review: This can be used in conjunction with either of the above two options. Where a firm identifies a bank of clients that may have suffered some form of detriment, it can offer those clients a review of their client files. This option is not popular as it poses a number of challenges, for example, a consideration of how to ensure the opt-in communication is worded in a way that clients fully comprehend the issues at hand. It may also flag a problem to a number of clients who have not actually suffered detriment and so would otherwise not have been concerned. 
  • Ceasing Pension Transfers: We are seeing a number of regulated firms deciding to stop advising their clients on DB transfers. This is particularly the case for firms that do not do this as a main business line. There may also be pressure from the FCA for a firm to volunteer a requirement to vary its advisory permissions (a so-called VREQ). In extreme cases, the FCA can compel a firm to do this. Firms should note that this does not stop any past liabilities crystallising in relation to previous DB transfer clients. 
  • Insurance Notifications and Renewals: firms with large books of DB transfer cases are having more and more difficulty obtaining PI insurance (even at increased prices). It is important to make relevant notifications in a timely manner and obtain, where appropriate, prior approval for certain actions (such as file reviews or significant engagement with the FCA).

How we can help

We work closely with firms assisting them in determining practically what they can and should do. We understand that firms do not operate in a bubble and that they must take into account both the standards at the time of the advice and the current regulatory landscape. We have previously undertaken the following for clients:

  • Advised firms on their communications with the FCA, particularly in high risk areas where one wrong statement may lead to more detailed regulatory scrutiny. This includes producing reports with the intention of them being shared with the FCA;
  • Advised firms on whether a particular issue is systemic, whether firms need to remediate clients and how;
  • Drafted, reviewed or amended the firm's policies and processes and advised whether they are sufficient and compliant with the relevant regulation and guidance;
  • Advised firms on how best to wind up a book of business and/or sell it to a third party, when it is both a voluntary decision or required;
  • Assisted firms in carrying out a specific or general client file reviews. Whilst maintaining legal privilege, if advantageous, we can either carry out the reviews or advise on the process being proposed to review client files, taking into account the FCA's expectations;
  • In the most unfortunate instances, we have assisted and advised firms through the FCA enforcement process.

Final Word

No one can be left in any doubt as to the FCA's intentions for DB transfers into 2019 and beyond. Indeed, the FCA has stated, "Firms falling to review or amend their business models in light of our concerns can expect serious consequences". With this in mind, January 2019 is a good time to proactively address any issues you may have with your DB transfer book of business.