Speaking to International Adviser, Codrington, global head of international pensions at TMF, said the city watchdog’s proposals to reform pension transfer advice, published last month, fail to address a number of key issues, including tacking unregulated introducers.
“The paper fails to address a number of fundamental points, namely contingent fees (used to be called commission), unregulated introducers and qualification requirement for the ‘overseas adviser’. Assuming the FCA can come up with a coherent standard questionnaire on what they consider to be ‘acceptable advice’, the ‘stable door’ is wide open for abuse,” he said.
Under the new system, designed to offer more protection for those considering giving up their defined benefit pensions, the current transfer value analysis (TVAS) requirement will be replaced with a comparison showing the value of the benefits being given up.
In addition, all advice provided on pension transfers will be seen by the regulator as a personal recommendation.
Adviser safeguard
Overseas pension transfers are also set to become more complicated to execute under the new FCA rules, with plans to keep the ‘adviser safeguard’ so expats are required to consult two sets of advisers – a UK-based FCA-regulated adviser and one based in the country where the expat is living.
Last September, the UK’s Department for Work and Pensions (DWP) published a consultation looking at whether to scrap the safeguard for British expats overseas which means an FCA-regulated adviser must be used for all pension transfers over £30,000.
A DWP spokesperson told IA that the department is aware of the FCA proposals and will take them into consideration when it releases its findings later this year.
Overseas advisers
Codrington said the FCA proposals including the adviser safeguard, still leaves products such as qualifying recognised overseas pension scheme (Qrops) ripe for mis-selling.
He referred to a scenario where an overseas sales organisation may be “masquerading as an adviser” and introduces a client to UK FCA-regulated pension adviser for a DB transfer to a qualifying recognised overseas pension scheme (Qrops).
“The UK adviser does his business in line with new regulations, with “advice” from overseas adviser, who may not be qualified or regulated to give that advice.
“The transfer is completed and the client is handed back to the overseas adviser, who then sells the client an expensive ‘wrapper’ or platform filled with non-retail funds and other toxic assets,” he said.
Codrington is now urging the FCA to consult with the industry as to how best to protect clients while maintaining pension flexibility, instead of coming out with “half measures which are unworkable, and provide little protection”.
Better protection
However, David White, partner at Isle of Man-based Qrops Bureau, said the FCA reforms recognise that British expats overseas may need to consult two sets of advisers, in the UK and their resident countries, when considering complex arrangements such as overseas pension transfers.
“The guidance issued by the FCA in January and this latest consultation acknowledges that there may be two advisers involved and will require detailed communication between the two advisers to ensure that the UK adviser, who is giving the advice on whether or not to transfer away from the scheme providing the safeguarded benefits, and the overseas adviser, who may be providing the ongoing investment advice,” he told IA.
White added that the new rules pension transfers is likely to make many UK advisers “increasingly cautious” in recommending a transfer to Qrops, which are now seen as less attractive following the British government’s decision to stick a 25% tax charge on such transactions earlier this year.
“The advice provided by the UK adviser must properly consider all of the ongoing charges involved in the pensions scheme to which the transfer is potentially being made, together with full details of all initial and ongoing charges involved in the underlying investment within the pension.
“The latest consultation also make reference to the UK adviser having to take full account of economic factors and local taxation treatment , in the overseas jurisdiction, which is often overlooked,” he said.
