DB transfers – have regulators struck the right balance?

As we have discussed in previous blog posts (find them here, here, here, here and here), defined benefit (DB) pension transfers are an area that the government and the regulators are increasingly keen to monitor and assess. This is primarily because of the concerns that most consumers will be best advised to retain their DB pensions and that, crucially, too much financial advice is still not of an acceptable standard. As a reminder, advice from an FCA regulated entity is mandatory for individuals who are seeking to transfer DB entitlements of more than £30,000, so quality of advice is paramount. As a result, we have seen the FCA step up its enforcement efforts considerably over the past year.

To illustrate this point, we learned from the Financial Reporter that the FCA recently fined an advice firm, LJ Financial Planning, over £100,000 after finding it transferred millions of pounds worth of clients’ DB pensions into high-risk and illiquid investments without giving proper advice. That is in addition to the £2.6m in redress that the firm had already paid to compensate members who were impacted by its failings. Mark Steward at the FCA said “Investors should be able to trust their financial advisers with the pension contributions they’ve built up over a lifetime of hard work … Redress is important but these investors should never have been placed in this position in the first place.” A strong and unequivocal message from the regulator.

So, did 2021 change regulatory attitudes? Not quite – it appears to us that the FCA is starting the new year as it means to go on. Just earlier this month, the FCA confirmed in a press release that it had commenced proceedings in the High Court against Paul Steel, director and co-owner of Estate Matters Financial Limited (in liquidation) (EMF), and his partner, Jacqueline Foster, alleging, among other things, that EMF contravened various legislative requirements by providing unsuitable DB transfer advice to members. So far, the FCA has secured an interim injunction freezing the assets of the defendants up to the value of £7 million, pending a further hearing. At that hearing, the FCA will ask the High Court to require Mr Steel to compensate consumers who have suffered losses.

On the other hand, some commentators are concerned that the FCA is going too far. Financial advisers advising on DB transfers are facing sky-rocketing insurance premiums and soaring fees. As a result, many of them are pulling out the market altogether. According to the Financial Times, four out of ten UK financial advisers offering DB transfer advice have raised their fees since 2018 and more than a third have stopped offering DB transfer advice in recent years. Of the firms that remain, advice tends to be risk-averse, even when the individual is seemingly a prime candidate for a DB transfer. John Salton is just one example – an individual with a DB pension pot worth £600,000, he was “disappointed” when he received advice to remain in his DB pension, despite wanting to transfer out in order to retire early, travel more and take on new hobbies.

Watch this space for more developments as we move further into 2021. In our view, the regulators are walking a tightrope and it remains to be seen whether they can keep their balance.