The defined benefit (DB) pension transfer market has been one of the most contentious areas within the financial advice sector over last few years.
The Financial Conduct Authority (FCA) has implemented changes and initiatives in a bid to fix issues surrounding the British Steel Pension Scheme (BSPS) scandal, including the ban on contingent charging and its newly established DB advice assessment tool (Dbatt).
But, as the FCA cracks down on the market, a large rise in regulatory fees and levies, as well as extreme increases in professional indemnity (PI) insurance premiums, has left many firms with no choice but to exit the DB sector.
Future of the DB market
David McKendrick, partner at Equilibrium Financial Planning, told International Adviser: “I think that there will be more exits in the market. I think that the marketplace will continue to shrink over the coming years.
“I still think that there will be a market, but I think you get into that danger zone where you have firms that maybe aren’t doing enough or keeping up to date on the legislation and rules.
“It will be harder to maintain standards if there’s less business around or less opportunity to provide advice, there has to be some sort of flow of work in that area.
“It’s interesting; in the short term, there may be more opportunity for those firms still in the market, while transfers are relatively high compared to the historic levels over the last 15-20 years.
“But, once everything starts to slow down and we get back to a little bit of normality, with slightly higher yields, gilts, and interest rates, then the market will quieten.”
Slow FCA
The UK regulator has been keen to continue its clampdown on the DB market, but this could have been done sooner, McKendrick said.
“This isn’t a new phenomenon, it’s been going on for a long time,” he added. “The FCA could have been ahead of the game on this one. It’s a complicated piece of advice. It’s one that absolutely isn’t right for all sorts of people.
“You would think that the point that we’re at now is actually probably a good point, with the loss of the unscrupulous advisers who were there to benefit themselves rather than their clients. They have been forced out of the market, which is obviously positive.”
McKendrick was asked whether he feels that the FCA are finished in their regulatory pursuit of the DB transfer market.
“There’ll be more reviews,” he added. “You see the numbers quoted for the amount of money transferred out of final salary pensions, its huge figures. Its formed large parts of various national companies flow of revenue.
“I’m very sure that it will be a continuing review from the FCA going forward.
“From our perspective, we’ve got third party compliance support, but beyond that, we actually got third party review of DB cases just to make sure that we are above board across the board.”
PI market
One of the FCA’s latest initiatives is the Dbatt which looks to help the market understand how the regulator looks into the suitability of advice given on DB pension transfers.
But, many advisers would argue that the FCA should be looking at the PI market, which is still causing large problems for many advisers.
“Our rates have stayed the same,” McKendrick said. “Our PI insurance has gone up but in line with the turnover the business, so that’s not a big problem. But with regards to rates going forward, I think the rules that are being brought in and the DB advice assessment tool, which are really steering people more down a path, should improve the marketplace.
“Hopefully, in time, you’ll avoid the British Steel situations, which I think it’s why a lot of these rules have been brought in. There are people who just should not be doing it after being told to do it.
“I’m pretty hopeful that the change in rules will still facilitate the ability for advice firms to be able to provide what I think is a valid piece of advice going forward, as long as the PI market keeps aligned with that, then I can’t see why it’s not a sustainable marketplace.
“But I do you think overall, the actual number of cases will decrease. I think we’ve seen that sort of perfect storm of low gilt yield and pension freedoms, which has obviously stoked the market up.”
