Recommending a ‘do not transfer’

Here is a question.

If a client is being recommended NOT to transfer, do you still need to identify a destination arrangement for transferred funds?

This question has been raised recently as we have seen an increase in the number of cases where the recommendation is ‘do not transfer’ and, at first sight it seems nonsensical to identify a target that there is no intention to shoot at!

Now, it is clearly appropriate that when recommending a transfer, the firm should know, specifically, which flexible benefits plan, provider and underlying investment that it is recommended the cash equivalent transfer value be transferred to. That is clear from COBS 19.1.1C.

“Before making the personal recommendation the firm must:

  1. determine the proposed arrangement with flexible benefits to which the retail client could move
  2. carry out the appropriate pension transfer analysis and produce the transfer value comparator.”

However, in the event that the firm’s analysis clearly indicates that the only suitable recommendation is ‘don’t transfer’ it seems inappropriate for any specific destination plan to be either considered or mentioned in the suitability report. The TVC can be produced without any specific plan, funds or charges being identified as the TVC is plan neutral. And, with knowledge of the client’s situation and objectives and ceding scheme details and the TVC, the firm can arguably undertake an appropriate pension transfer analysis that could compliantly conclude that the recommendation should be don’t transfer.

There is no clear indication in the definition of ‘advising on conversion or transfer …’ provided in PERG 2.7.16 and 2.7.16H that appears to exclude the identification of a specific proposed arrangement where a transfer is not being recommended but as indicated above, it does not seem to be necessary or sensible to have to do so in that situation.

However, the glossary definition of ‘proposed arrangement’ …

“the arrangement with flexible benefits to which the retail client would move and takes into account the subsequent intended pattern of decumulation”

… does not explicitly require a specific provider and plan and funds to be identified. It can be interpreted as merely requiring A flexible benefits plan and intended profile of decumulation to be the potential destination.  So, back to the question – where analysis and TVC clearly indicate a do not transfer recommendation, does a specific plan need to be identified.

The FCA’s view

When advising on conversion or transfer of pension benefits, and giving full pension transfer advice, COBS 19.1.1CR(2) requires firms to:

• determine the proposed arrangement, and
• carry out appropriate pension transfer analysis (APTA)

before they make a personal recommendation. Further, COBS 19.1.2BR requires firms preparing APTA to consider how the benefits and options under the proposed arrangement compare with those under the ceding arrangement.

The FCA considers that the glossary definition of proposed arrangement requires the specific arrangement, i.e. where the pension wrapper and the investments that would be held within that wrapper have been identified, as well as the intended pattern of decumulation. This is consistent with the requirements for preparing APTA. For example, COBS 19 Annex 4A requires firms to use rates of return which reflect the investment potential of the assets in which the funds would be invested under the proposed arrangement.

So, when giving full pension transfer advice, a firm should not be concluding whether a transfer is suitable or not before they have undertaken APTA, including the comparison with the proposed scheme, as the analysis will inform the recommendation.

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

The FCA position rests entirely on the fact that COBS 19.1.2BR requires firms preparing APTA to consider how the benefits and options under the proposed arrangement compare with those under the ceding arrangement. And proposed arrangement is defined as a pension plan with flexible benefits. Accordingly, the conclusion, perverse or not, is that the APTA MUST include a comparison with a target arrangement even where there is no recommendation that the target will be used.

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About the Author

Paul is a Chartered Financial Planner and is well on his way to a Fellowship. He has a thirst for technical knowledge and, while he advises on all aspects of financial services regulation, he specialises in pensions and investments.

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