Our submission to the FCA’s latest consultation on DB pension transfers (CP18/07) is . The new proposals are contentious and potentially far more significant than any before.
Our general observation is that this makes the perfect the enemy of the good. It is arguable whether consumer outcomes will be significantly helped by its proposals whereas they definitely put up barriers to finding advisers willing to act, or to act at a price people are willing to pay. Cynics will argue that this is the intention: you can’t thwart the application of Parliament’s Pension Freedoms to final-salary pension schemes but you can try to regulate transfers out of existence. Our comments have taken the FCA’s intentions at face value but we still question the cost/benefit trade off it is making.
There are two new initiatives that compound the cost impacts.
The FCA has decided very late in the day (so after publishing new rules for transfer advice, including new prescribed numerical formats) that the rules (if not the same formats) should apply equally to actual or implicit advice to retain a DB pension. Given the need to address pensions holistically, this means it will be difficult to avoid advising on any DB, whether the client wants it or not.
It has stated that most forms of ‘triage’ that aim to assess on a ‘quick and dirty’ basis the prima facie grounds for either retaining or transferring, are in fact implicitly personal recommendations and therefore require a full, compliant advice process.
You might imagine that the FCA’s stated position that transfers are not in the best interests of most people (so it is surely expecting an exception report) would justify a quick and dirty justification for retaining, rather than an expensive advice process. But it is the FCA’s generalisation about suitability that is wrong. The logic that retaining or transferring is a symmetrical risk preference requiring the same investigation and demonstration is in fact impeccable. A transfer is not fundamentally different from any investment choice between risky and risk free assets or assets with certain or uncertain future outcomes. But if it really believes the risk of detriment is not symmetrical, why impose this additional advice cost?
The process of discovering client risk preferences can be a stepped one, with a series of thresholds or eliminators. This obviously has a role in triage. So our response makes the case for threshold-based advice processes to guard against either no investigation being undertaken or unnecessarily comprehensive investigation. One obvious means of writing this script is using an interface with a quantitative engine that performs the numerical functions the FCA wants to see. Perhaps this is something that should involve the FCA’s Project Innovation team rather than just the transfer team, as it may be hard for regulators to visualise how technology can reduce both wasted cost and bias in an advice process.
The proposals include something the House of Commons Work and Pensions Select Committee bounced the FCA into: considering a ban on contingent charging. The idea is that, if an advisor stands to make nothing from advising retaining DB rights but an advice or arrangement fee for a transfer, it will lean towards advising a transfer. The existence of a conflict is clear. But it is not unique to transfer advice. And even in the case of a transfer the present value of a fee stream for managing the transfer monies, which is necessarily contingent, is likely to be a multiple of the transfer fee. There are in fact many situations in financial services like this that are ‘all or nothing’. Regulation recognises the reality that there are unavoidable conflicts of interest in financial services and so it relies on duties of care rather than a stricter ‘fiduciary’ requirement to avoid any conflict of interest. The principle is not beyond discussion (indeed legislative debate has been raging for many years in the US) but any change would have to apply to all advice, not just transfer advice.
Absent a fiduciary rule, the duty of care is best prescribed by regulation. Transfer advice is in fact the most heavily prescriptive of all, dating from a time when the quantitative calculations required were restricted to actuarial consultants, before being made available more widely to advisers via software. The earlier consultation has amended and strengthened the prescriptive rules. Penalties for bad practice are also a deterrent and these are much heavier in the case of transfers for the very reason that the amounts of money represented by a transfer quote are often very large. The basis for calculating redress is itself prescribed.
Although Fowler Drew charges a combination of a flat fee and a contingent element, we oppose the FCA’s proposal in principle. But we also made the argument (as no doubt have many respondents) that this is what consumers want. They do not want to fund the advice with hard cash from outside the pension scheme or pay from a net-of-tax rather than gross ‘pocket’. And they do not treat advice to retain as being worth as much as advice to transfer, even if the FCA thinks they should.
All of this will push the cost of advice up. It also risks further shrinking the supply of advice. This particularly applies to advice for self-directed investors, where the adviser risks being responsible for the outcomes even when they had no control over the investment (or spending) strategy the individual adopted.