The Financial Conduct Authority’s proposed ‘polluter pays’ regulations could lead to far fewer firms offering advice on on defined benefit transfers.
Actuarial consultants OAC, part of the Broadstone Group, pointed out that there was already a shortage of advisory firms operating in this sector, but these new rules would place a “significant burden” and are likely to cause further exits from this market.
The FCA proposals require firms to calculate their potential redress liabilities at an early stage, set aside enough capital to meet them and report potential redress liabilities to the regulator.
Any firm not holding enough capital will be subject to automatic asset retention rules to prevent them from disposing of their assets.
This is a change from current rules where compensation for firms going out of business is funded by an industry-wide levy. While some in the industry have criticised this as placing a heavy financial burden on firms who abide by the regulation, others claims this new approach could also create problems.
OAC head of redress solutions Brian Nimmo says these reforms could have a major impact on firms advising on DB transfers. “‘Polluter pays’ reforms will further increase the regulatory and financial burden on advisory firms – both now and in the past – who help those with a DB pension explore whether a transfer is in their best interests.
“Firms will have to assess the risk in their book before calculating a redress value on that risk which is likely to be an extremely tricky exercise. It may see an acceleration of the trend for advice firms to leave the market as they look to limit the capital they have to hold against future redress claims.
“Firms should be talking to their advisers to explore their capital requirements to get ahead of the game if these proposals are implemented.”
OAC’s DB Redress Tracker follows the example of an individual who left their scheme in 2018 aged 50, with a pension of £10,000 a year which would receive inflation-linked increases when in payment.
The Tracker is developed in line with FCA rules for calculating redress with the individual assumed to have invested their funds to earn returns in line with the FTSE Private Investor Index.
It finds that a transferor making a compensation claim in Q3 2023 would have been entitled to around £22,000, a figure that has dropped significantly as gilt yields have risen over the past 18 months.
A similar claim made in Q1 2022 could have seen the transferor entitled to over £165,000, for example.
