More than half of all positive recommendations to transfer from a DB scheme have been found to be potentially unsuitable in an FCA probe.
An FCA review of 88 DB transfers where the recommendation was to transfer found that just 47 per cent were judged to be suitable, with 17 per cent definitely unsuitable and 36 per cent where it was unclear whether the recommendation was suitable or not.
The regulator also found that just 35 per cent of products recommended to receive the DB transfer assets were suitable, with 24 per cent unsuitable. In 40 per cent of cases the FCA was unclear whether the recommendations were suitable or not.
The FCA says proportion of suitable cases for DB transfers was much lower than in the wider advisory market for pensions advice, where in a recent review it found 90 per cent of pensions accumulation advice, and 91 per cent of retirement income advice, to be suitable.
The regulator investigated 22 firms on their DB transfer business over the last two years. Following analysis of this information it reviewed a sample of client files for 13 firms, and visited 12 firms. As a result of its assessments, 4 firms have chosen to stop advising on DB transfers.
The FCA says many of the firms it looked at had designed processes and procedures which result in transfers where the suitability of advice could not be established by the firm.
It says firms had failed to obtain enough information about clients’ needs and personal circumstances and consider the needs of the client alongside the client’s objectives when making a recommendation.
It also accused firms for not making an adequate assessment of the risk a client is willing and able to take in relation to their pension benefits.
In some cases advisers had failed to make appropriate comparisons between the defined benefit scheme and the intended receiving scheme, meaning advice was based on incorrect or inaccurate comparisons.
The FCA has recently consulted on changes to its rules and guidance on pension transfer advice, and a response is expected soon.
The regulator says it will continue to monitor this market and assess firms who provide advice on DB transfers. It intends to carry out a further phase of supervisory assessments starting in the current business year.
A statement from the FCA says: “Some of these firms made transfer recommendations without considering a receiving scheme or investments, or knowing the introducing adviser’s intentions for investment. This opened up the risk of consumers’ pension savings ending up in inappropriate or scam investments.
“In some cases there was a lack of information sharing between the introducing firm and the specialist transfer firm. This resulted in unsuitable advice where the specialist firm did not have enough information about the client’s objectives, needs, and personal circumstances. We do not expect the specialist transfer firm to duplicate advice or make recommendations when an introducer is providing the regulated advice on investments. But we do expect them both to share information on the destination of the funds.
We found firms where the adviser or transfer specialist made a recommendation without knowing where the transfer proceeds would ultimately be invested. In some cases the specialist transfer firm did not make a recommendation for a receiving scheme or investments. This was on the understanding that the introducing adviser would make a recommendation after the transfer had concluded. In these cases the advisers had not checked what the introducing adviser’s intentions were and could not take into account where the proceeds would be invested. Also we could not see how the specialist transfer firm could produce accurate comparisons between the DB scheme and the receiving scheme. The potential income in retirement in the ceding scheme will be affected by product and fund charges, and the likely returns. The client would not be able to make a fully informed decision without a comparison which took all of this into account.
“At some firms the transfer analysis was routinely based on ‘default’ schemes and/or funds, in the knowledge that these would not be the actual receiving schemes. We set out our concerns about such practices in an alert in January 2017. We were disappointed that while firms were generally aware of the alert, not all of them had taken effective action.”
Hargreaves Lansdown head of policy Tom McPhail says: “Taken in conjunction with evidence of a rapid decline in demand for annuities, we are concerned about pension investors’ increasing dependence on non-guaranteed pensions for their retirement security. This has important implications for policy makers in government and in the FCA.”