A review commissioned by the FCA into financial advice to people who were offered enhancements (ETVs) to incentivise them to leave their employers' defined benefit (DB) pension schemes has identified a risk of customers losing out on retirement income due to poor advice.
Separately, the FCA has today published the results of a thematic review into SIPP operators.
The FCA thematic review found that, despite previous warnings, some firms are still failing to fulfil their regulatory obligations.
It is disappointing that our review saw failings in the advice given, particularly when incentives have been provided to consumers to transfer
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Many firms were found not to have the necessary expertise to assess high risk and non-standard investments and often failed to understand and identify the correct prudential rules which apply to their business.
The FCA has written to the CEO's of all SIPP firms to warn them of the failings uncovered by its recent thematic review and asking them to take action to ensure that their business operates within FCA rules.
The FCA have already required several firms to limit their business as part of the thematic review and in some cases have initiated enforcement investigation. Over the coming months we intend to visit more firms, and expect to see significant improvements.
Pension transfer advice failings
The review looked at nearly 300 cases from bulk pension transfer advice exercises between 2008 and 2012, selected from financial advisory firms active in this area.
In a third of these cases, the review found that the advice given to customers was not suitable although the failings were not equally spread across the financial advisory firms.
Clive Adamson, director of supervision at the FCA said:"Transferring from a defined benefit scheme to a defined contribution scheme is an important decision for consumers. It is disappointing that our review saw failings in the advice given, particularly when incentives have been provided to consumers to transfer.
"All firms active in this complex area of pension transfer activity should think very carefully about the quality of the advice process and assurance framework required to deliver fair customer outcomes."
In the coming weeks the FCA intends to follow up its concerns with individual financial advisory firms and ask them to contact members and offer redress where appropriate.
The FCA will work with firms to ensure that affected consumers receive appropriate redress and for most consumers there is no need to act straight away.
Any consumer who has immediate concerns about the financial advice they were given should, in the first instance, contact the financial advisory firm which advised them.
ETVs may be offered by employers to incentivise members to transfer out of their DB pension schemes, such as a final salary scheme, into a defined contribution (DC) scheme, typically a personal pension.
The incentive offered is an increase in the pension transfer value. In the period covered by the review, the incentive may also have included a direct cash payment to the DB scheme member upon transfer.
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When a transfer is made from a DB to a DC scheme the risk is transferred from the employer to the member. The member loses the underlying guarantees of the DB scheme and has to take personal responsibility for investment decisions.
Drivers of unfair customer outcomes found in the review included:
- generic templates which were inadequately ‘tailored' so the advice did not reflect specific member circumstances or give sufficient priority to the members' own requirements;
- advice where the outcome focused solely on critical yield analysis without full consideration of wider member circumstances;
- not establishing adequately the level of risk a member is willing and able to take;
- fund recommendations which did not match the assessed risk profile of the member;
- the use of default receiving schemes (in some cases with uncompetitive charging structures) and limited consideration of the suitability of a member's other existing pension arrangements; and
- limited consideration of the tax and in a small number of cases ‘means tested benefit' implications of accepting the offer.
In the ETV pension transfer process, the FCA regulates the pension transfer advice given by financial advisers to members of pension schemes who are seeking to transfer benefits into an FCA regulated pension scheme.
