Stuck in a transfer tangle

Regulation around transfers out of pensions – DB or DC – is stretching the adviser/client relationship to breaking point. John Lappin reports

The general public think they have been granted the freedom to take their pensions. But those who have tried to move from DB to DC arrangements to take advantage of this new-found liberty are finding the theory does not always meet the practice.

Some members are convinced the ‘pensions industry’ is standing in their way for its own financial benefit. National newspapers have been scathing about blockages in DB-to-DC transfers, as well as straight DC withdrawals, and the industry has also faced criticism from politicians including pensions minister Ros Altmann and Chancellor George Osborne, who has announced a Treasury review that is looking at exit charges and other obstacles to transfers.

Significantly, the FCA says it may look at the basis for transfer value analyses (TVAS) again given that the comparison is now likely not to be an annuity but investment in a DC scheme.

Amid all this mostly unflattering attention, workplace advisers find themselves operating under two regulators, both of which have had to adapt their regime to the new system very rapidly, while retail advisers with the appropriate qualifications have been given an even more important role in the process.

IFAs and workplace consultants find themselves on what could be regarded as different sides of the same coin. DB scheme advisers and trustees cannot sanction a transfer on amounts above £30,000 without the member having obtained advice from an appropriately qualified IFA, although they do not have to check the advice itself. This change was introduced through an amendment to the regulated activities order in the Financial Services and Markets Act and came into force alongside the pension reforms in April.

And while some experts deem the position for DB trustees reasonably clear in terms of the rules, some transfer-receiving providers still have misgivings about when they should or should not accept money. Hargreaves Lansdown has suspended DB transfer advice citing the fact that it had reached capacity, although it is still accepting transfers into its platform.

An FCA paper Pension Freedoms: Data Collection Exercise published in September found 56 per cent of firms accept DC transfers in all circumstances and 12 per cent do not in any circumstances. For DB, 56 per cent oif firms accept transfers in some circumstances. with 25 per cent taking transfers in all circumstances and 19 per cent not accepting transfers in any circumstances.

Regulatory pressure

Yet recent regulatory history may be giving advisers food for thought. The regulator is requiring Origen to take out a costly Section 166 skilled persons report over past enhanced transfer value recommendations. While this pre-dates the pension freedoms, many advisers will be focused on the fact that Origen has estimated the review to cost £204,000 and set aside £297,000 in 2014 for client compensation as a result.

Almary Green managing director Carl Lamb is very cautious on behalf of clients but also in business terms.

He says: “If anything, the rules should be tighter, having seen our FCA fees going up by 116 per cent. Unless a transfer specialist is involved and signs it off, it shouldn’t be allowed to happen.

“There are exceptions to the rule, say where someone is married to a much younger spouse and scheme rules on death will pay out only a fraction to the widow. But for Mr and Mrs Average, the national press have been a bit reckless and are in danger of talking things up so that people think they should be doing something, when clearly they shouldn’t.

“It is about protecting clients but it is about protecting my company too.”

Retirement Intelligence director Billy Burrows is likewise concerned. “This is the car crash that was waiting to happen. People think they can do what they wish but the regulator thinks otherwise. Advisers won’t bend the rules because they have been burned in the past.”

A recent FCA consultation on proposed changes to rules and guidance (CP15/30) asks for further input on insistent clients. The consultation says: “We are aware that advisers are still uneasy about dealing with insistent clients, particularly in relation to scrutiny by the ombudsman service and the availability of professional indemnity insurance. We would be keen to hear further from advisers on how they consider that our rules could be amended to provide more certainty. We would also like to find out more about why advisers consider that professional indemnity insurance acts as a barrier to undertaking insistent client transactions.”

Basis of calculations

But should the basis of the calculation shift? Burrows says: “It depends what question you are asking. Some people can analyse things rationally and make the right decision. Others can’t analyse it rationally.

“It’s not the technical analysis that has to change but the client’s understanding of the benefits they are giving up and the risk they are taking.”

Providers are also concerned about the public perception but Aviva’s position is clear. Head of policy, retirement solutions, John Lawson says: “Aviva only accepts transfers from DB to DC when submitted via a regulated financial adviser. We don’t know whether the transfer is in line with or against the advice of the adviser, so the adviser is effectively dealing with the insistent customer issue rather than Aviva.

“The FCA factsheet issued in June 2015 makes it clear how it expects advisers to deal with insistent customers, so advisers should read this and act on the FCA guidance if they are not already doing so.

“It is up to the adviser whether they are prepared to process an instruction that goes against their recommendation and this is a matter for each adviser to consider. The attitude of the adviser’s PI insurer may also have a bearing on how they deal with insistent customers.”

Martin Tilley, director of technical services at Sipp and SASS specialist Dentons, says: “There may be compelling reasons to transfer that are not mathematical but that give the impetus to transfer. One IFA told me about a client with a £500,000 DB transfer valuation. The IFA said he would take it himself but he has to recommend not to take it in his report.”

Tilley adds that there is huge concern about claims chasers in future challenging advice with the Financial Ombudsman Service.

He adds: “Through regulatory fear and paralysis, you are not going to get anywhere at all. Even with insistent clients, a lot of IFA compliance teams, regardless of the FCA factsheet, are saying the advice is ‘Don’t do it’, then you can’t help them transact it.”

“What the Government has got to do is talk to the regulator and ombudsman and then make the individual responsible.”

Standard Life head of pension proposition Jamie Jenkins says: “I read with great interest about complaints to the FOS, where in one example someone said he had been to a dozen advisers, none of whom gave him favourable advice to transfer, and he was complaining about his inability to do so.

“We have some people who have a very strong view that they know what to do but they have to pay someone to tell them not to do it. It is no surprise that advisers don’t want to get involved facilitating that.”

But Jenkins points out that policies differ between receiving providers, so most insistent clients should be able to find a home for their money.

Simon Laight, partner and leader of national insured pensions practice Pinsent Masons, believes that all participants face risks and that few are happy with the situation.

“The receiving provider is very unhappy because it is turning away business that otherwise it might accept, and the consumer wants it to accept. The financial adviser is extremely wary about taking or processing the insistent client business, even where the consumer says ‘Thanks for the advice but now go away and do the execution for me and I’ll indemnify you’. Advisers are worried about the FOS if things go wrong.

“The transferring schemes are in a difficult position. Should they let the money go or retain it?

“On the face of it, all the statutory requirements around the member retaining an adviser are there. But nobody’s happy. The consumer is unhappy because they want to do
the conversion for flexibility and three or four different bodies are saying ‘You can’t do it’. Yet on the telly they are saying ‘This is your money and you can have access to it after 55’.

“It is incumbent on the Government and regulators to get a grip on this with all the players in the market. It needs to happen to achieve proper access.”

Yet Laight believes trustees are in a better position than advisers. He says: “The FCA issued a factsheet on insistent clients but I don’t think it helps advisers at all. It does not really provide clarity.

“From trustees’ perspective, they have a regulatory guide from TPR that does provide practical steps. The key phrase is that trustees’ role is to check that the appropriate advice has been obtained by verifying that the adviser’s confirmation meets the legislative requirements. From that you can construct a process enabling DB trustees to move forward. They have a possible route forward to make reasoned decisions and record it. They shouldn’t go as far as requesting the financial advice but they should not just rely on their member’s statement. If they have doubts, they should contact the financial adviser and ask ‘Have you given financial advice to this person?’”

Laight has concerns too about the covenant. He says: “From the financial adviser’s position, it is hard to know what to take into account.

“Should you take into account the covenant? The regulator said no but that is one of the most important things if you are in a well-funded final salary scheme with a weak employer.

“Even the guidance and legislative construct is known in some cases to be flawed. Stuff is excluded that in many people’s view should be included. This is a mess that has been exacerbated by the hasty introduction of freedom and choice.”

Regulatory and political consultations to date

In regulatory guidance issued in April – ‘DB-to-DC transfers and conversions’ – TPR makes the position of trustees very clear, including not predicting a member’s decision.

It says: “It is not the trustees’ role to second-guess the member’s individual circumstances and choice to transfer their safeguarded benefits. It is also not their role to prevent a member from making decisions that the trustees might consider to be inappropriate.

“In addition, the advice is likely to be confidential to the member. As a result, trustees should not request a copy of the advice the member has received or make enquiries about the substance of the advice. Their role is to check that the appropriate advice has been obtained by verifying that the adviser’s confirmation meets the legislative requirements.”

The FCA consultation on transfers was launched in March this year with the details of the rules published in June. But crucially, the requirement to take advice on a transfer above £30,000, and for transferring schemes to check this, came into force on 6 April.

However, in June the FCA issued a feedback paper to the above consultation along with rulebook amendments. It indicated a possible shift in future.

A key passage says: “Later this year, as part of our broader review of our handbook pension rules, we will consider whether there is a need for a full review of our TVA requirements. We appreciate that the requirements were established when the only option within a contract-based pension scheme was to purchase an annuity. We are keen to explore the options for reviewing the TVA methodology in light of pension flexibilities and will seek input from stakeholders on this process.”

In June, the FCA issued a factsheet on the pension reforms and insistent clients.

The key passage, including the three key steps for IFAs dealing with such clients, is as follows –

“1. You must provide advice that is suitable for the individual client and this advice must be clear to
the client. This is the normal advice process.

2. It should be clear to the client that their actions are against your advice.

3. You should be clear with the client what the risks of the alternative course of action are.”

But perhaps of even more significance for advisers are the views of Harriet Myles, an outreach officer from the FOS, who gave her view of best practice in July.

Talking at an Association of Professional Financial Advisers seminar, she said: “Advisers we speak to seem to be coming up with good solutions on how to deal with insistent clients – things like cooling-off periods and making these clients put things in their own words.”

If advisers are going to process transfers, more safeguards will clearly be better than less.

Then in September the FCA launched a consultation on proposed changes to rules and guidance in light of the pension reforms (CP15/30).

That consultation asks: Given that the main barriers to transacting insistent client business are external to the FCA, how do you consider that regulation could be amended in a way which facilitates such transactions more easily but still provides a satisfactory level of consumer protection?