RGP COMPLIANCE TR14/12 - Enhanced Transfer Value "ETV" Pension Transfers Although this bulletin is focussed on enhanced transfer value transactions, it also have relevance to firms undertaking “standard” pension transfers. This Thematic Review was commissioned by the FCA into financial advice given to people who were offered enhancements (ETVs) to incentivise them to leave their employers’ defined benefit (DB) pension schemes and has identified a risk of customers losing out on retirement income due to poor advice. The review also identified examples of good and poor practice , set out in Chapter 2, that further illustrate the failings highlighted below. 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. 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 and firms have to ensure that the transfer will deliver a suitable outcome for the pension scheme member. 1. WHAT IS THE FCA SAYING? 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. The key outcomes were: • In a third of these cases (34% unsuitable), the review found that the advice given to customers was not suitable although the failings were not equally spread across the financial advisory firms. • In nearly three-quarters of these cases (74% unacceptable), the review found disclosure failings; the main causes of disclosure failings were the use of a rigid advice process that did not always allow for consideration of individual member circumstances or information needs, and the absence of clear contemporaneous records. Drivers of unfair customer outcomes found in the review included: • generic templates that 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 on critical yield analysis without full consideration of wider 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 some cases ‘means tested benefit’ implications of accepting the offer. Drivers of disclosure failings included: • • • • • • incomplete record keeping; limited information capture and documentation of the insistency process; the ‘annuity risk’ of transfer from DB to DC not being fully explained; over emphasis on the possible ‘flexibility’ under a DC scheme in undertaking the transfer analysis; offers being structured against a reduced transfer value and therefore appearing artificially generous; and no consideration of the members’ Additional Voluntary Contribution (AVC) funds as part of the advice process. RGP COMPLIANCE 2. WHAT IS THE FCA ASKING FIRMS TO DO? FCA rules These require that a firm must ensure that a communication by the firm to a client is fair, clear and not misleading. A firm must take reasonable steps to ensure that a personal recommendation is suitable for its client. Guidance in the FCA Handbook provides that when advising a retail client who is, or is eligible to be, a member of a DB occupational pension scheme whether to transfer or opt-out, a firm should start by assuming that a transfer or optout will not be suitable. A firm should only then consider a transfer or opt-out to be suitable if it can clearly demonstrate, on contemporaneous evidence, that the transfer or opt-out is in the client’s best interests. Pension transfer specific provisions are provided in COBS 19. The FSA issued guidance on how to comply with the rules (e.g. FSA and the Pensions Regulator joint statement ‘Enhanced Transfer Value Exercises’, July 2010, and FSA FG11/05 on ‘Assessing suitability: Establishing the risk a customer is willing and able to take and making a suitable investment selection’, March 2011). The Pensions Regulator has issued guidance on several occasions. ‘The Incentive Exercises for Pensions – A Code of Good Practice’ of June 2012 (voluntary code) also outlines principles to follow when providing ETV advice (e.g. no cash incentives should be offered that are contingent on the member’s decision to accept the offer). FCA expectations The FCA expects firms to ensure that any pension transfer advice is sufficiently robust to meet their requirements. Senior management of authorised financial advisory firms should satisfy themselves that their firms’ practices in relation to pension transfer advice deliver fair customer outcomes. 3. WHAT SHOULD YOU DO NOW? All financial advisers who provide pension transfer advice, including where ETVs are offered, should consider: • the FCA Handbook requirements; • the relevant guidance; • findings in this paper and the examples of good and poor practice provided; and review their arrangements accordingly. 4. FURTHER INFORMATION The full details of the FCA’s guidance are contained in http://www.fca.org.uk/static/documents/thematicreviews/tr14-12.pdf. You can of course contact your usual RGP Compliance consultant with any queries you may have on +44 (0)20 7422 7780 or email us at [email protected] August 2014 As from 1 April 2013, RGP was appointed to the Skilled Person Panel in the following areas: Governance, Controls & Risk Frameworks, Conduct of Business, Financial Crime, Data and IT Infrastructure, Prudential – Deposit takers, Recognised Clearing Houses, Investment Firms, Recognised Investment Exchanges. Please click the FCA and PRA websites to see the Panel in full. Please contact Simon Collins, +44 (0)20 7422 4172, for more details. RGP | 6th Floor Eldon House | 2-3 Eldon Street | London EC2M 7LS Tel: +44 20 7422 7780 | [email protected] | www.resourcesglobal.com Follow us on