Paving the way to better outcomes for members
FCA Consultation on DB transfer advice
31 May 2018 - Estimated reading time: 3 minutes
In light of emerging evidence of material failures in DB transfer value advice (including the British Steel case where thousands of members suffered at the hands of poor advisers), the FCA is consulting on further improvements to advice process through Consultation Paper CP18/7. This follows its widely anticipated Policy Statement (PS18/6) to support financial advisers on giving pension transfer advice. See our earlier blog on this here.
The consultation includes raising the qualification levels for financial advisers, issuing guidance on how firms can carry out an appropriate ‘triage’ service without crossing the advice line and potentially introducing a ban on contingent charging.
We welcome these further proposals aimed at better protecting member outcomes particularly in relation to the industry having an informed debate on contingent charging. Although contingent charging can be helpful in allowing consumers to access financial advice that they might not otherwise be able to afford, in its crudest form it means some advisers only get paid if they recommend a transfer value. Under this approach it is hard to understand how the advice can be truly ‘independent’ and in the best interests of consumers. As well as giving greater transparency to advice recommendations, banning contingent pricing models like this would help restore some confidence in the advice market.
A ban on contingent charging would be highly disruptive for advisers and would not be straightforward to implement given the broader link to charging structures for accessing investment platforms/ products and ongoing advice. An outright ban on contingent charging may also lead to a reduced number of advisers operating in the DB to DC space and a reluctance for members to take advice if they have to meet upfront costs directly. This feels a particular barrier for members with small pension pots where the costs of advice are highly material in the context of the size of their pension fund. This issue therefore needs full debate with real focus on how the availability, costs and quality of advice will be impacted if contingent charging is banned.
It is clear that quality triaging services have an increasingly valuable role to play in the advice process – they can help educate and inform members and advisers, bridging the information gap and ultimately reducing the costs of advice. Further, by educating those members where it is clear that staying in the DB scheme is the right thing to do, such services allow advisers to focus their time and resources on advising members who most need it. Further guidance around the boundaries of these types of services would helpful – this would help allay any fears that the industry has around over stepping the guidance line and moving into advice.
The role of triage services will become even more important if contingent pricing is restricted or banned as members look for more efficient ways of understanding whether a transfer could be the right thing to do. It is a positive step that the FCA is looking at contingent charging and triage services in a joined up way
Providing better support to members
The proposals put forward by the FCA are generally positive and in the best interests of members. More generally, it is great to see the industry debating such important matters that will have a real impact on the financial futures of millions of DB members. It is however a shame that the Pension Freedoms have been in play for over 3 years and only now is the FCA seeking to address that the current advice guidance is no longer fit for purpose. Indeed it has taken material failings in the current approach for the FCA to really react to these issues.
Although these proposals will help improve the quality of DB to DC transfer advice, a large part of the responsibility for ensuring members make a good retirement choice also lies with trustees and employers. Providing members with balanced and engaging information on retirement options will help member understanding and better prepare them for decision making. By facilitating quality financial advice, trustees and employers can ensure members are able to access good quality advice when they need it, and through economies of scale at an affordable and transparent cost. Schemes don’t need to wait for the outcome of the latest consultation to make sure their members are protected.
With sufficient planning and the right member focused approach, trustees and sponsors can take freedom and choice in their stride and ensure they’re not leaving their members’ retirement outcomes to chance. Getting this right can only be a win-win for schemes and members. To find out more about how you can support your members, download our research report or listen to our recent webinar.