The Financial Conduct Authority (FCA) has published guidance for financial advisers setting out how they should provide advice on defined benefit (DB) pension transfers.
The regulator said that this could likely mean firms will need to change their processes where “their approach falls short of the standards” it has established.
It aims to “help firms give suitable advice consistently”, the FCA said.
The main areas of focus include the way advisory businesses collect information about their clients’ circumstances; use the information to assess whether a transfer is suitable; and communicate their advice effectively to consumers.
The FCA added: “The impact of unsuitable DB transfer advice on consumers is significant. Having lost the security of a guaranteed income, consumers bear the risk of how their pension investments will perform and whether these will provide the income they need for the rest of their life.
“They also become responsible for paying charges that, for many, will be one of their largest monthly expenses. These charges are not obvious to many consumers because they are deducted from their pension investments.
“We will carry on our work to identify and stop those firms which we consider are causing harm to consumers, including the appropriate removal of poorly performing firms from the market.”
Detailed expectations
The watchdog emphasised that advisory firms should keep records on DB transfer advice “indefinitely, whether advice was given, or a transfer was arranged on an execution-only basis”.
“Often, consumers make claims about DB transfers many years after the advice was given,” the FCA said. “Professional indemnity insurance (PII) providers have said that claims are typically made seven or more years after the advice was given.
“As memories fade with time, detailed records will show the steps you took when you gave advice, arranged for them to give up their safeguarded benefits and made arrangements for a new pension scheme.”
Andrew Tully, technical director at Canada Life, added: “Today’s finalised guidance gives advisers a clear steer what the FCA is expecting around defined benefit transfers. While many people will be better off remaining in their DB scheme, there are some specific situations, such as those in ill-health or heavily in debt, where a transfer will be the best outcome.
“The FCA also highlights the inconsistency of record keeping by advisers and provides guidance on the processes advisers may want to put in place so they can establish whether the DB advice is suitable or not.
“It is right that we have strong controls in place around this complex part of the market but also recognise there is a demand and need for advice. This guidance will hopefully help ensure we continue to have a functioning DB transfer market while reducing the instances of poor outcomes for consumers.”
