The backdrop to the current regulatory warnings about pension transfers starts with the pension freedoms that were announced by Chancellor George Osbourne in 2015. These were designed to encourage pension saving on the basis that they would make pension monies more accessible. This they did, with the resultant boost to the economy as over 55s drew down ever larger proportions of their pensions to buy goods, services and retirement. The unintended consequences were that advisory firms suddenly struggled to save people from their own baser instincts when it came to ‘money now’ verses ‘deferred gratification’ or long term financial security. Furthermore, whilst some advisers wrestled with this conundrum, others saw this as an opportunity to open up a new and lucrative market, funded by money previously tied up in pensions, most specifically those final salary pensions where the funds had previously been fairly untouchable.
British Steel pensions have become untouchable, the high concentration of potentially unsuitable transfers found by the regulator has now made these pensions virtually untouchable, but is this the correct result?
The regulator did react and the regulator did issue guidance and it did amend the guidance. This scandal is not the fault of the regulator, it is the fault of immoral, unethical and possibly ‘weak’ people in positions where they should be advising people to do the right thing and not necessarily making money. All the rules that apply have biased advisory firms towards transfers due to the way they are paid. Contingent charging and the facilitation of fees through investments mean that they are unused to asking for fees and in turn, those advised, are unused to paying these fees. Indeed the regulator has expressed surprise and disappointment at the volumes of potentially inappropriate business that has occurred. Before 2017 there was regulatory guidance in place that suggested several reasons why a transfer might be suitable; this stood until the British Steel headlines broke and the contention that transfer might potentially be suitable, was withdrawn.
Pre-2017 possible rationale for transfer, acceptable to the regulator:
So we can see a real change whereby some of the scenarios where the transfer appeared to be in the clients’ best interests are now being dismissed by the regulator who now firmly goes back to the pre-pension freedom narrative of transfers unlikely to be suitable. Indeed, this must now be the starting point for any discussion and further, following the new rules from October 2020 it will not be possible to do a transfer for any reason apart from the first two above and rely on ‘contingent charging’. This is where the advice is only paid for if the transfer goes ahead and the advice can be facilitated through the pension, because the client cannot otherwise afford it. The regulator has stated that not transferring is unlikely to cause harm to anyone except in the two dire situations outlined above.
During 2019 the FCA conducted a survey of all firms offering DBT advice about business undertaken from 2015 – 2019. Within this period, in June 2018, there was a major change to the rules around DBT advice, this skewed the survey results as firms interpreted the questions differently and/or did not hold any “advised not to transfer” data until June 2018. It was also skewed by the various interpretations of “insistent client” that firms made, particularly prior to the new rules.
The rule change that really affected the data was the requirement from June 2018 to either advise for or against a transfer with no grey areas in between. Up until that time, firms had frequently dissuaded clients from exploring a pension transfer on the grounds that it was not in their best interests, thus saving them a hefty fee only to be told a transfer was not recommended. These cases were rarely recorded. Where the adviser considered the client may have a case; sometimes analysed the pros and cons of transfer for a client and then allowed the client to choose the option that they felt gave them the most benefit. Then there were clients who had no choice about the transfer, clients who had pots worth less than £30,000 and pension sharing orders. Some of these were recorded as insistent prior to the FCA providing a clear definition.
The survey results showed many firms having very high conversion rates, subsequent analysis of their data often revealed that this was an untrue picture when all the clients advised not to transfer were located and recorded.
The cost of the receiving schemes was also explored. Clearly in every case the client’s pension will have gone from no charges, to some charges. The question was whether or not the solution was cheaper than stakeholder. Stakeholder being largely defunct, is now more expensive than most recommendations and furthermore, cannot provide the flexibility that is needed for the clients’ needs and objectives to be met.
Now with hindsight and a global pandemic, it will be possible to see the advantages bestowed by the choice of receiving schemes. We can now compare the relative performance of these schemes verses others.
Good advice or bad advice?
This is the real question and to address it we need to look at clients, as it has been clients’ desire to proceed with transfers that has driven the quantum of transfers that have been undertaken. So let’s look at the differences between adviser processes and files so we can see how the FCA has arrived at the conclusion that so many transfers shouldn’t have taken place and has made swingeing new rules that will have the affect potentially of closing down this market due to the uncertainty around PII and the very limited ability to charge on a contingent basis. Good advice or bad advice?
Types of practise that the FCA viewed as entirely unacceptable verses what good throughout advisers have been doing:
We can see here that the good and bad advice are worlds apart, In between there are also many cases where the problem is one of record keeping rather than poor advice, but the lack of good file records means that the FCA reviewers have been unable to ascertain whether or not the advice was suitable.
Many clients approached advisers with their CETV (Cash Equivalent Transfer Value), blinded by the vast sum of money on offer, determined to release it without caring what the adviser recommended. These clients though fell into more than one camp and it was down to advisers and their firms to police this behavioural bias.
Types of insistence:
There has been a great deal of pressure on advisers from clients who insist they want to transfer, understand the risks and wish to proceed anyway. Added to this is the policy of many firms not to undertake insistent client work, driven by their PII refusing to cover these scenarios or by the desire to always act in a client’s best interests. This has driven some advisers to agree with clients against their better judgement.
The FCA rightly points out that advisers should offer advice and not be order takers. The unwillingness of some clients to take advice should not be viewed as an excuse for poor advice. This is of course easier said than implemented when faced with a sophisticated individual demanding to exercise their right to do what they wish with their money!