FCA's new rules on DB transfers risk unintended consequences

The FCA’s new rules which will ban contingent charging and introduce the option for firms to offer abridged advice on defined benefit (DB) transfers came into force today (1 October 2020). These measures are intended to improve the quality of DB transfer advice. However, they could have the opposite effect if they result in more good advisers leaving the market, thereby reducing the availability of good quality advice.

Draft guidance, which was published alongside the final rules, may also require trustees and employers to review the support and information that they provide to members in relation to DB transfers to avoid inadvertently giving regulated advice (to read more about this click here).

So, what do these changes mean for the DB transfer market?

Background

Over the last five years, the FCA has taken several steps to address the risks associated with DB transfers and to improve the quality of DB transfer advice. Despite these interventions, the FCA still considers the proportion of DB members who seek advice and then go on to transfer their benefits to be too high (with over 72% of the 235,000 DB members who obtained advice between April 2015 and September 2018 going on to transfer their benefits). It also thinks that the risk of harm from unsuitable advice remains "unacceptably high".

These ongoing concerns led the FCA to publish Policy Statement 20/6 in June 2020, in which it confirming its plans to improve the DB transfer advice market by, among other things:

• banning contingent charging in all but a few circumstances
• introducing a new abridged advice process, and
• introducing a requirement for advisers to prioritise transfers to a workplace defined contribution (DC) pension scheme when advising on DB transfers.

The FCA hopes these changes will raise the standard of DB transfer advice and help reduce the incidence of bad advice. However, these new measures could make matters worse in some respects as they risk forcing even more advisers to leave this market, which could leave members more vulnerable by further reducing access to affordable, high quality advice.

Concerns over new rules

The planned changes have prompted a number of calls from those within the pensions industry for the FCA to clarify how these new measures are intended to operate. In particular, concerns have been raised about:

• the requirement for advisers to prioritise a DC workplace pension scheme as the destination for a DB transfer and to demonstrate why any alternative scheme they might recommend is more suitable
• the merits of the new abridged advice option, and
• the blanket ban on contingent charging.

Is it better than a workplace pension scheme?

There are concerns that identifying a workplace pension scheme (such as a master trust) as the default destination suggests that such schemes are the most appropriate for all members, when in reality this will not always be the case.

In addition, a recent survey by LCP found that this new requirement may not provide the consumer protection that is intended. LCP found that the limitations associated with some master trusts, such as the limited investment options that some master trusts offer, could make it relatively easy for advisers to  recommend their preferred destination, whilst satisfying the FCA’s new benchmarking requirement. However, this may not always be in the best interests of the saver.

Abridged advice

There have been calls for clarification on how the new ‘abridged advice’ option is intended to operate. Advisers will be able to give abridged advice only where the outcome is:

• a personal recommendation to the client not to transfer or convert their pension, or
• to inform their client that it is unclear whether they would benefit from a pension transfer or conversion based on the information collected. The adviser must then check if the consumer wants to continue to obtain and pay for full advice and that they understand the associated costs.

The FCA hopes that this will provide more customers with access to affordable initial advice. However, it is unclear how a personal recommendation not to transfer or convert can be made without having carried out all stages of the full advice process. This new option also doesn’t solve the problem for customers who may be able to afford abridged advice but not full advice.

Contingent charging

The FCA has introduced the ban on contingent charging to address the inherent conflict of interest to which contingent charging gives rise. The FCA also expects the ban to curb the increasingly high fees customers are being charged when they transfer their benefits, as it will require the same fee to be charged for advice regardless of whether or not an individual goes ahead with the transfer.

The ban has been welcomed by many who say it will help remove any conflicts of interest, support advisers in the market that did not take advantage of the ability to charge significantly higher sums where an individual transfers and encourage good practice more generally among advisers.

However, others remain concerned that the ban will negatively impact the DB transfer market. Whilst the FCA is keen to drive down the costs of DB transfer advice and increase access to good quality advice, there are concerns that the ban could lead to a large number of good advisers exiting the market, which would have the opposite effect to what the FCA intended.

An adviser exodus?

The concern that these new rules could disincentivise advisers and cause even more to exit the market was confirmed by a recent survey by Royal London. Published in September 2020, the survey revealed that over a third of advisers that were active in the DB transfer market 3 years ago have stopped advising on DB transfers. Among the top reasons for this was the level of regulatory scrutiny. Rising professional indemnity (PI) insurance costs was another significant factor. Indeed, 58% of the firms surveyed said they would consider re-entering the market if there was a change in the FCA’s approach or more reasonable PI costs.

Comment

These new rules demonstrate the FCA’s ongoing concerns about DB transfers and its determination to improve the quality of DB transfer advice. However, they may have unintended consequences. In particular, if, as expected, the new rules result in more good advisers leaving the market, they could undermine the FCA’s aim of making it easier for members to access good quality advice.

These new rules have come into force at a time of great economic uncertainty, which may prompt more individuals to consider “cashing in” their DB pensions. Furthermore, at a time where DB transfer values are relatively high (with the average DB transfer in the three months to June worth £556,000), it is more important than ever that members can access affordable, high quality advice. Therefore, let’s hope that these new rules achieve the FCA’s objectives and prove the doubters wrong.

Related posts

FCA’s DB transfer guidance may restrict information trustees can provide to members

FCA pushes ahead with plans to improve DB transfer market