Based on data and live visits to firms during the period from April 2015 to rule changes in 2018 and 2020, the FCA believed that far too high a proportion of clients were being recommended to transfer safeguarded benefits. This was predicated on the longstanding rule which stated:
“… a firm should start by assuming that a transfer, conversion or opt-out will not be suitable and should only consider a transfer, conversion or opt-out to be suitable if it can clearly demonstrate, on contemporary evidence, that the transfer, conversion or opt-out is in the retail client’s best interests …”
In the period leading up to the 2020 rule changes, the regulator had also found that many firms were operating ‘triage’ processes that led to them not engaging with some clients on the basis that a transfer looked unlikely to be suitable. All good, except for the fact that many of these processes inadvertently strayed across the regulated advice boundary, without adhering to the applicable rule requirements for advising on pension transfers. So, firms amended the process to be purely generic and informational with no opinion offered or implied as to whether the client should or should not transfer. Again, all good, except that with the ban on contingent charging, that meant that some clients seeking transfer advice, which was in most cases mandatory, would have to pay for full advice … only to be recommended not to transfer.
Abridged advice for pension transfers became an option with new rules introduced on 1 October 2020. The FCA stated that this new ‘abridged advice’ option was intended to help firms give advice to consumers to remain in a DB scheme at lower cost. It is effectively a halfway house between non-regulated triage and regulated full transfer advice. In order to achieve this previously tricky compromise, the outcome from abridged advice is explicitly constrained.
Abridged advice can only result in:
- A personal recommendation not to transfer or convert the pension.
- A statement that it is unclear whether the client would benefit from a pension transfer or conversion based on the information collected through the abridged advice process. The adviser must then check if the consumer wants to continue to full advice, and if they understand the associated costs.
The FCA initially proposed that abridged advice would only include the initial stages of the full advice process, including a full fact-find and risk assessment and that clients could receive a personal recommendation not to transfer or convert without an adviser having to collect detailed scheme data, undertake Appropriate Pension Transfer Analysis (APTA), or provide a Transfer Value Comparator (TVC). In the final rules, the FCA clarified that firms must not undertake APTA, provide a TVC or consider the consumer’s proposed receiving scheme because, if firms undertook these processes as part of abridged advice, they would effectively be giving full advice without charge which would undermine the ban on contingent charging. However, the final rules and guidance also permit advisers to collect and consider further information on the benefits of the client’s existing scheme.
Abridged advice is unlikely to be appropriate in some situations, such as where the client wants advice on different options, like partial or full transfer, or which, if any, of multiple schemes should be transferred.
How is it going?
When abridged advice was initially proposed, it is fair to say that opinion was split on whether it was a good idea or not, whether clients would be prepared to pay a fee to be told to stay in the existing scheme and whether many firms would actually offer an abridged advice service – it is not mandatory.
Now that abridged advice has been with us for nine months it is fair to say opinion is still divided. Many firms offer the service – and many do not. It is difficult to be definitive about the stats, not least because continuing PI problems and FCA scrutiny has resulted in a significant decrease in the proportion of firms now offering transfer advice – down from around 44% to 22%* over the course of 2020. Of those firms still providing transfer advice, just over half (51% *) offer an abridged advice service. (* Source: Aegon research with Next Wealth. Managing Lifetime Wealth: retirement planning in the UK 2021 Report.)
We have no reliable data on the number or proportion of clients who engage with abridged advice. In theory, 100% of clients approaching a firm that offers it should go through the abridged advice process as any fee paid will be deducted from the fee charged if they proceed to full advice, so there is no cost disincentive for clients. However, abridged advice does mean extra work and an additional suitability report for firms – all for the same fee that would have applied if the client had gone straight to full advice in the first place. And, for clients, the process means they will have to take further full advice if they want to obtain an ‘appropriate independent advice’ confirmation under section 48 of the Pensions Act 2015. This is a prerequisite for most transfers. So, the jury is still out on whether there is sustainable demand for abridged advice and whether firms will continue to offer it. Time will tell.
Sounds simple, but isn’t
When giving abridged advice, firms must consider the risks of staying in the scheme and the risks of transferring and losing the benefits. And, as stated earlier, firms must not undertake APTA, provide a TVC or consider the consumer’s proposed receiving scheme. As abridged advice does not consider how funds might be invested if a transfer proceeded, firms must not assess the risks associated with a specific flexible arrangement. And preparing a cash flow model or other projections is also not permitted.
However, all the normal suitability rules apply, which means firms must gather sufficient information about the scheme and the client to enable a conclusion to be reached. The latter includes all the usual client information but specifically including clear objectives/drivers for considering a transfer, knowledge and experience and attitude to investment risk and transfer risk. Sometimes, the attitudinal information will reduce the need for full information elsewhere. For example, a client who is found to be totally risk averse, or who wants secure income is unlikely to be a suitable candidate for transfer and a “don’t transfer” recommendation could be sufficiently justified on those grounds alone. Most cases, though, will be a bit more nuanced than this and will require a comprehensive fact find to be done, not least to identify clear and robust objectives/drivers, and a conclusion to be considered.
In our experience, while the restrictions on process and outcome are clear and unambiguous, many firms have found it difficult to actually implement what appears to be a simple process. It is all too easy to stray outside the boundaries of abridged advice.
Consider the following Abridged Advice Report Conclusion …
“Based on the information collected through the abridged advice process, I have concluded there is insufficient information to make a recommendation on whether you should transfer the XYZ Pension Scheme at this stage. I have outlined the reasons for my conclusion below:
- Whilst both routes potentially will enable you to enjoy the lifestyle that you desire in retirement, the transfer route will offer the greater level of flexibility that you desire. You want to be able to adjust how much you draw each year in retirement, accessing only what you require, taking all other guaranteed income into consideration, which commence at different stages
- The transfer is expected to provide you with access to a larger amount of tax free cash, which can be accessed flexibly and independent of drawing an income, which will help minimise tax and preserve capital for longer for any future unplanned spending
- By doing so you will be able to preserve funds for longer, which you will be able to pass on to Cathy on death, allowing her in turn to maintain the same level of flexibilities. In turn she can then pass on any unused funds to your children, John and Jane, all potentially free of IHT, which you see as an added benefit of the transfer.
- By transferring your defined benefit pension you are sacrificing a safeguarded and secured scheme pension, which includes inflation proofing. You will be responsible for all ongoing charges that will apply to the administration and investment of your pension fund. These charges can be substantial. If you wish to receive a recommendation on whether to transfer or not, you will need to proceed to Full Advice in order for me to undertake a detailed analysis of the benefits within the existing scheme and include this information in a more thorough examination of your current circumstances, needs and objectives”
We would consider the first paragraph to be worded inappropriately. It implies that there is not enough information and would beg the question of why more information was not gathered! The appropriate abridged advice rules version would be “… it is unclear whether you would benefit from a pension transfer based on the information collected through the abridged advice process …”. This is subtly yet significantly different. It implies that all necessary information was gathered, within the constraints of the abridged advice process, but, while that information does not clearly enable a don’t transfer recommendation, it is unclear whether the client might benefit from a transfer.
In our view, the rationale described in the first three bullets goes further than is permitted under the abridged advice rules and guidance. FG21/3 states: “If the outcome is inconclusive, you should not imply that taking full advice is likely to result in a recommendation to transfer.” This holds true even if the firm has reason to believe that a transfer is likely to be suitable.
The situation post-transfer is not described in a balanced and generic manner. On the contrary, the ‘benefits’ of transfer are not only emphasised but linked to the client’s specific situation, even going so far as offering positive opinions on how the various features of a drawdown plan would be advantageous to the client (more cash, minimise tax etc.) and his wife Cathy and children John and Jane. We are always keen to see suitability reports being personalised but, in this context, the application of personalisation is inappropriate. The text in the final bullet is inoffensive but firms do need to be careful not to recommend that the client proceeds to full advice.
A simpler thought process
Having discussed the difficulties of actually implementing abridged advice for specific clients with several firms, we have concluded that there is a simple underlying principle that can be applied. That principle is captured in our statement above:
“… while that information does not clearly enable a don’t transfer recommendation, it is unclear whether the client might benefit from a transfer …”
Having gathered sufficient information on the scheme, but more particularly, on the client, there may be some factor(s) clearly indicating that a transfer would not be appropriate for this client. Apart from the attitudinal aspects mentioned earlier, it is difficult to come up with a list of other factors that would lead to a clear and obvious “don’t transfer” as these will be very client specific by definition. However, that is the point. In the absence of any unassailably obvious reason that the client should not transfer, the only conclusion that can be reached is “it’s unclear …”.
Life after abridged advice
Regardless of whether the abridged advice process recommended “don’t transfer” or merely stated “it’s unclear”, clients can decide whether to proceed to full advice.
Where clients proceed to full advice having previously received abridged advice where the outcome is unclear, the FCA expects that the subsequent full advice will result in recommendations not to transfer for some consumers once the firm has been able to fully analyse the impact of transferring to a specific product with flexible benefits.
Where abridged advice results in a recommendation not to transfer, but clients proceed to full advice, the FCA’s expectation is that, in most cases, the advice should continue to be that the individual should remain in their existing arrangement.
A client can only be considered as an insistent client following full advice.