FCA rules on DB transfers – adding fuel to the fire?

Over the past few months we’ve reported on the increasing regulatory interest in the activities of firms advising on UK DB to DC transfers (see our earlier blog posts here and here) and the potential liability flowing from ill-advised DB transfers.

As mentioned in our blog post in early June, the Financial Conduct Authority (FCA) has sought to address the issue of unsuitable advice provided to scheme members by publishing, amongst other things, a policy statement on pension transfer advice and a guidance consultation document for those advising on DB transfers. However, the new guidance has come under fire from certain quarters in the pensions industry.

Last week, the Association of Consulting Actuaries, the Pensions Administration Standards Association, the Pensions Management Institute and the Society of Pension Professionals issued a joint letter to the Pensions Minister, Guy Opperman, and Economic Secretary to the Treasury, John Glen, complaining that the new rules on the regulated service of giving advice presents a “trap” for some trustees.

According to the guidance consultation, providing illustrative figures that compare the outcome a member would receive if they kept or transferred an existing benefit might “steer a member towards a specific course of action, which is part of the regulated advice process.” The FCA guidance is clear that this would likely constitute providing advice or an inducement, which would require authorisation.

However, pensions advisers are concerned that the guidance consultation means a significant minority of schemes would need to change their retirement processes. James Riley, President of the Society of Pensions Professionals, believes that firms will be forced to restrict the advice that they provide to members to avoid “overstepping the mark.” Further, following the FCA’s announcement that contingent charging will be banned from 1 October 2020, financial advice firms might be forced to greatly reduce their services or, worse, leave the market completely.

On the one hand, restricting access to this advice could be perceived to be part of a broader regulatory effort to disincentivise members from giving up the security of DB schemes. Indeed, both the FCA and the Pensions Regulator (TPR) take the view that retaining DB benefits are in the majority of members’ best interests. But others are concerned that the new stance risks leaving members in the dark about pension transfers at a critical time. Indeed, the risk of this outcome occurring seems more likely than ever in light of the record high transfer values at the end of July (see XPS Pensions Group’s transfer value index here).

The combination of the above factors might be enough to accelerate an increase in DB transfer activity. In addition, as we have noted previously, as members come under growing financial strain as a result of the effects of the COVID-19 lockdown, the promise of a flexible and immediate source of cash may further tempt them away from the security of their DB benefits.

In response to recent events, IFAs, employers and trustees will need to carefully consider how to tread the line between informing and advising members on a complicated issue which may have serious financial implications for members, not to mention the potential impact on IFAs (and even employers and trustees who engage IFAs to advise members) if it later turns out that decisions were not in members’ interests. This will not be an easy balance to strike.