FCA: less than half of defined benefit pension transfer advice is suitable

The number of people seeking advice on these transfers has grown significantly over the past year, according to the FCA. However, the regulator found examples of advisers failing to obtain enough information about clients' needs and personal circumstances before making a recommendation, as well as basing their advice on incorrect or inaccurate comparisons between the DB scheme and intended receiving scheme.

The FCA recently consulted on further changes to its rules and guidance on pension transfer advice, and is due to respond to this consultation shortly. It will also carry out further supervisory assessments this year in an attempt to monitor compliance.

Pensions expert Carolyn Saunders of Pinsent Masons, the law firm behind Out-Law.com, said that the FCA's latest findings "highlight the importance" of its work around clarifying what is expected of those who advise on DB transfers.

"IFAs [independent financial advisers] are at the sharp end of the recent explosion in transfer activity," she said. "However, others in the industry can also play a role in reducing the risk of unsuitable transfers by doing what they can to make sure that scheme members understand the value and importance of financial advice."

Advising on the transfer of 'safeguarded' pension benefits worth over £30,000 to a defined contribution (DC) or personal pensions has been a distinct regulated activity in the UK since 2015, coinciding with the entry into force of new flexibilities around how DC scheme members access their savings from the age of 55. DB and other safeguarded benefits are usually backed by employer guarantees, so it is the FCA's view that foregoing flexible access in order to retain these valuable benefits will be in the best interests of most consumers.

In its June 2017 consultation paper, the FCA acknowledged that the new pensions environment meant that transfers may now be suitable for more consumers than was previously the case. However, in order to maintain a sufficient level of consumer protection, it has proposed a requirement that advice on safeguarded benefit transfers must be given in the form of a personal recommendation, along with changes to the way in which the benefits being given up should be valued.

The FCA has been monitoring the DB transfer business of 22 firms over the past two years, including 88 transfers based on a recommendation to transfer. It found that the advice given was suitable in only 47% of those cases. The advice was unsuitable in 17% of the transfers it reviewed, while it was unclear whether or not the advice was suitable in the remaining 36% of cases.

The findings were even more concerning when looking at the suitability of the product or fund that the saver was advised to transfer into. Here, the advice was suitable in only 35% of cases, compared to unsuitable in 24% of cases and unclear in 40% of cases. Previous work by the FCA around the suitability of pensions advice has found much higher percentages; for example, suitable advice in 90% of pensions accumulation advice cases and 91% of retirement income advice cases.

The FCA also raised a number of specific concerns about specialist pension transfer advice firms, many of which obtain a large part of their business through introductions from firms that do not advise on DB transfers. Some of these firms made transfer recommendations without sharing appropriate information on the receiving scheme or investments or the introducing adviser's intentions for the investment with the introducer firm, opening up the risk that consumers' pension savings would be transferred to inappropriate or 'scam' investments, the FCA said.

Four of the firms who were visited by the FCA as part of its review have decided to stop advising on DB transfers as a result of the regulator's intervention, it said. More broadly, 32 firms have chosen to stop providing transfer advice or to limit their pension transfer activity since the start of 2016.