Alongside Policy Statement PS18/6, relating to new rules and guidance on pension transfer advice, the FCA has issued a consultation paper CP 18/7, seeking views on a number of proposals that the FCA believes will improve the quality of transfer advice. Anyone wishing to comment on the proposals can do so until consultation closes on 25 May 2018. The key points are summarised below.
Pension Transfer Specialists
In support of the changed rules on the role of a PTS in checking transfer advice that apply from 1 April 2018, the FCA is proposing that a PTS should hold a Level 4 RDR qualification, in particular relating to investment knowledge, by October 2020.
In addition, the FCA proposes that the exam standard for ApEx 21 (the PTS qualification) should be expanded to take account of the pensions freedoms and the mandatory advice requirement, as well as the rules and guidance in PS18/6 and proposed in CP18/7. The new exam standard would, therefore, cover personal recommendations and advice boundary issues, appropriate pension transfer analysis (APTA) and transfer value comparator (TVC), overseas advice and taxation.
Those who already hold the PTS qualification will not need to take exams based on the new syllabus. But firms are reminded of their responsibility to ensure that advisers are aware of recent developments and have the necessary level of knowledge and experience in line with the requirements of the Training and Competence Sourcebook.
Firms are reminded that pension transfer advice must take account of the proposed destination of the transferred funds. This has implications in three different situations, and the FCA proposes the inclusion of new rules and guidance:
- Where two advisers are involved
In this event, advisers need to work together and there should be clarity of roles and responsibilities. If client information is not clear or sufficient the PTS needs to speak with the adviser who has spoken directly with the client or ideally directly with the client.
- Non-UK clients
The same principles apply as the UK PTS will need to work with an adviser in the jurisdiction where the client lives in order to cover the expertise required around different tax and pension rules that might apply.
- Self-investor clients
As with the two-adviser situation, the paper states that the ‘rules do not prevent this’. This negative statement is possibly an indication that the FCA would still expect it to be unusual. Regardless, the key point is that the destination plan and funds must be considered in assessing the suitability of the transfer. It is possible that the transfer is not suitable with the client’s choice of funds but could be suitable with a different funds. This would have to be explained to the client.
The FCA has identified that advice should assess both the risk of transfer and investment risk. These are not the same thing and the former is unlikely to be covered in a traditional ATR tool. Advisers should take into account:
- the risks and benefits of staying in the safeguarded benefit scheme
- the risks and benefits of transferring to a flexible benefits scheme
- the client’s attitude to certainty of income throughout retirement
- whether the client is likely to access funds in flexible benefits in an unplanned way,
- and the impact of that on the sustainability of the funds over time
- the client’s attitude to any restrictions on their ability to access funds in a safeguarded benefits scheme
- the client’s attitude to and experience of managing investments themselves or
- paying for them to be managed in a flexible benefit scheme
- attitude to transfer risk in a way which is fair, clear and not misleading,
Some firms have been undertaking an initial triage process in order to filter out clients that they do not wish to advise. The FCA has identified cases where this process strays across the advice boundary. They propose new rules and guidance to prevent this. The proposal is that any triage process should be educational and not related to the individual’s personal situation. It should be based around the provision of generic balanced information about the pros and cons of transfer.
The FCA believes that this method of charging presents a risk, particularly in relation to pension transfer advice. Views are sought on whether and how to ban contingent charging.
… odds and ends
Currently any recommendation not to transfer should be ‘confirmed in writing’ but does not necessarily require a suitability report. It is proposed that a Suitability Report will be required. This is good practice anyway and, in practice, is necessary if the client might subsequently be dealt with as an insistent client. In our view, it also adds weight to the case for a non-contingent charging model.
There are proposed changes to pension increase assumptions and some small but significant changes to the definition of ‘pension transfer’ to remove inconsistencies and to ensure it only applies to advice where safeguarded benefits (other than GAR) are being moved to a flexible benefit.
Note: references to pension transfer also include conversion or opt out where applicable in the rules.