The FCA has announced a wide package of measures aimed at improving the quality of future advice on defined benefit (DB) transfers.

    Among these measures is its policy statement on pension transfer advice published in June, which sets out the regulator's feedback on previous consultations, as well as guidance and final rules. 

    The FCA has stated that when it comes to DB transfers there are "too many instances where transfers were not in consumers’ best interest."

    The regulator's focus therefore is to empower consumers and make sure clients understand the advice given.

    It's important from both an adviser's and paraplanner's perspective to understand and factor in how the rules are changing when working on a DB case.

    There are elements that must be included in the suitability report, and some which are required to be retained on file.

    Strap in as this is quite technical, but clearly very important when it comes to the DB advice process. 

    The changes to be aware of 

    First of all there will be changes to the triage process.

    The aim of triage is to give a prospective client sufficient information about safeguarded and flexible benefits, to help them decide whether or not to take advice on the transfer or conversion of their pension.

    The new rules state:

    • Decision trees or red, amber and green (RAG) status indicators in triage are not allowed
    • Any consideration of a customer’s circumstances which steers them one way or the other is likely to be advice
    • Some firms did not have controls or records relating to their triage service, so it's important these records are kept on file

    The FCA has now added another layer to help a client in the process called abridged advice, which firms advising on pension transfers can opt to provide from 1 October. 

    Simply with this process, there are only two outcomes.

    A personal recommendation to the client not to transfer or convert their pension; or to inform the client that it's unclear whether or not they'd benefit from a transfer or conversion based on the information collected.

    The main rules for abridged advice:
    • You must consider the risks of staying in the scheme and the risks of transferring and losing the benefits
    • The advice must not consider how funds might be invested if a transfer proceeded
    • Abridged advice and full advice must be carried out, or checked, by a qualified pension transfer specialist (PTS), and is considered a personal recommendation
    • You should not charge the client for the same work twice
    • Carry out a full fact-find
    • An assessment of attitude to transfer risk, capacity for loss, attitude to investment risk and relevant knowledge and investment experience 
    • You must not carry out an appropriate pension transfer analysis (Apta) or provide a transfer value comparator (TVC)
    • You can collect further information on existing scheme benefits without compromising the role of abridged advice

    The diagram below sets out the overall process:

    FCA pension transfer advice process

    The contingent charging ban

    Advisers must charge the same amount for advice to transfer as not to transfer. This could be a shock to the system for many advisers.

    The new rules related to the ban are:

    • Carry out a full fact-find
    • There can be no additional ‘implementation’ fees
    • No difference in ongoing charges to make up for lost initial fees
    • Initial fees may vary depending on the number of schemes. Fees should be set out in a clear and easy to follow pre-determined criteria and process

    When it comes to HMRC & VAT, while there may be no product linked to the advice provided (in the event of advice not to transfer), HMRC has advised that VAT will still not apply.

    However, an unauthorised payment charge will apply if fees are taken from another pension arrangement.

    There are specific groups of consumers who aren't subject to the ban, known as 'carve outs'.  These are:

    Serious ill health 

    This is where life expectancy doesn't go beyond age 75.

    Advisers do not need to seek medical opinion, but it is expected that advisers will have seen self-evidence from the client as to their treatment plans or supporting information.

    Serious financial difficulty

    This is when the client finds keeping up with bills and repayments a heavy burden.

    The criteria here is if three or more monthly bill or loan repayments have been missed in the last six months.

    Evidence is needed for the above, the test of 'serious financial difficulty' won't be met if the client has savings or investments or is able to cover ’non-essential’ spending. 

    Other carve outs include pipeline cases, pension sharing orders and transfers outside the UK.

    It's worth noting that all carve out clients should be treated as vulnerable. 

    Think about what other help should be given in these circumstances, such as debt counselling.

    Workplace pensions vs alternatives

    Another big change is that advisers and paraplanners now need to consider a client's current workplace pension in more detail.

    It's also not enough to just consider it.

    If the recommendation is to go to any other pension, then you must clearly demonstrate why that is more suitable than the client's existing workplace scheme.

    This will add more to your suitability reports, but it's important that workplace pension schemes are covered in more detail than a simple sentence or two.

    What the FCA expects to see:

    • You only need to compare against one of the client’s workplace pension schemes, not all previous schemes 
    • A comparison against the client's most recent workplace scheme, but
    • If you consider a previous workplace scheme to be a more appropriate comparison then this is acceptable. For example, if the most recent scheme doesn't accept additional contributions or if the client isn't an active member at the time of comparison
    • If ongoing advice is needed, this should be considered as part of the recommendation, including the option of paying ongoing adviser charges directly, rather than through the scheme
    • A standard paragraph to dismiss a workplace pension scheme in the suitability report won't satisfy the new rules
    • Firms should also be looking to change their process to be able to carry out the required analysis as part of the Apta process.

    Auto-enrolment has been with us for some time now, and it's highly likely clients are already enrolled in a low-cost qualifying workplace pension scheme, in addition to any personal pensions they may have.

    Some key things to consider when looking at existing schemes:

    • Internal fund research
    • Level of employer contributions
    • Overall charging structure
    • Does the workplace provider/scheme facilitate adviser charging?
    • Reduction in yield comparison
    • Are there multiple tax wrappers available within the workplace scheme?

    Disclosure rules

    Before a firm provides any regulated advice it's important that it is personalised and distinguishable from letters sent to other clients.

    This letter must be provided in ‘writing’ which also extends to non-paper methods. It should also detail the amount the client will pay for advice in pounds and pence.

    The requirement applies to abridged, full and ongoing advice. 

    You must get evidence that the client can demonstrate they understand the risks of going ahead with a transfer or conversion before finalising the recommendation, and keep a record of this evidence.

    Also, signatures alone will not always confirm understanding.

    The changes being made to TVCs are:

    • Firms should assume a female member of the scheme has a male spouse or partner who is three years older; or a male scheme member has a female spouse or partner who is three years younger
    • Reduce the pre-retirement expense assumption used in the TVC from 0.75 per cent to 0.4 per cent to reflect the lower costs of investing solely in gilts
    • Base the rate of return during accumulation on the five to 10-year UK FTSE Actuaries Index or the 10- to 15-year index, and disregard the 5- to 15-year index

    It's anticipated that software providers will make changes in the coming few months.

    The systems you use for TVCs are likely to update their default settings to run them on this basis, so it may be that you don't need to worry too much about these.  

    There is also an additional reporting requirement as part of your firm's regulatory return, section RMA-M. 

    This covers data on DB and other safeguarded benefit advice. It also serves to monitor the number of carve-out clients given a recommendation to transfer or convert their pension.

    The first submission is required by the end of April 2021.

    The final change to note is that PTSs are required to carry out 15 hours of CPD focused on the activities of a pension transfer specialist.

    The additional CPD requirement breaks down as:

    • Five hours to be provided by an external provider
    • Nine hours need to be structured learning
    • Six hours may be unstructured
    • Checking and delivering advice can be included
    • This can be aligned with the PTS’s normal CPD year and statement of professional standing
    • Additional prescribed CPD will be compulsory from 1 October

    Much of the new rules and guidance comes into effect on 1 October, and the rules on triage were introduced in June. 

    It's a lot to take in, but it's worth looking to implement these changes sooner rather than later as best practice. 

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