Defined Benefit (DB) transfers – further update on our work

Multi-firm reviews Published: 05/06/2020 Last updated: 05/06/2020

As part of a package of measures to improve standards in this area, we are setting out further findings from our assessment of the suitability of Defined Benefit transfer advice.

Defined benefit transfer advice has been a focus for the FCA for a number of years. The decision to transfer out of a defined benefit (DB) scheme is a complex one and we remain of the view that for most people a transfer out of a DB scheme is unlikely to be suitable. However, the number of consumers receiving a recommendation to leave their DB scheme has been consistently too high.

Who this update is of interest to

The findings are relevant to all firms providing advice on DB transfers. These firms should consider our findings and how they apply to their own organisations.

Why we are providing this update

We have set out a package of measures to improve standards and build on the work we have previously done. This includes a Guidance Consultation for those advising on DB transfers to help advisers who want to provide good quality advice, an 'Advice Checker' for consumers, and policy changes addressing conflicts of interest in charging for DB transfer advice. In this report, we set out the work we have done assessing the suitability of advice, the findings of which have informed the measures announced today.

In June 2019, we provided an update on our work on DB transfers and stated we would be directly assessing the firms most active in this market throughout the remainder of 2019. This is an update on our assessment work.

This latest update includes our findings from a further sample of 85 firms, responsible for advice on 43% of DB transfers between April 2015 and September 2018. Since April 2015 we have assessed firms responsible for over 49% of transfers.

Key findings

Fact-finding: material information gaps (MIGs)

We are concerned that too many firms are failing to collect the information necessary to provide suitable advice. The most common areas we identified where material information was not collected or was missing from the client file provided to us included the client’s:

  • anticipated income and expenditure in retirement and how this may fluctuate
  • objectives and the role their pensions play in meeting those objectives

Many firms recorded some detail about discussions held with clients. However, fewer firms could show how they determined whether the client had the correct attitude to the risks of transferring from a safeguarded DB pension to a defined contribution (DC) pension with flexible benefits

Our recent Policy statement gave guidance to firms on the type of factors to consider when assessing whether a client understands and can accept transfer risk. We are also consulting on further guidance on our expectations of firms when giving advice. We encourage all firms giving DB transfer advice to revisit our guidance and update their procedures accordingly.

Professional Indemnity Insurance (PII)

We expect that all firms providing DB transfer advice have appropriate PII cover in place, in line with our rules. If they don’t have appropriate cover, they should not be advising on DB pension transfers. This includes stopping any pipeline business.

Appropriate cover should not:

  • exclude relevant lines of business, such as DB pension transfers
  • include sub limits meaning cover falls below the minimum requirements; for example, where a financial adviser is an IDD insurance intermediary, the minimum required is €1.25m for a single claim and €1.85m in aggregate
  • include excesses at such a level which would render the cover materially ineffective

Of the 745 firms who amended their permission because of our interventions, 55 stopped after we identified they did not have adequate PII. This resulted in their withdrawal from the market.

While we recognise that the market for PII has hardened, and costs have increased, firms generally are able to source PII insurance. Firms often attribute having frequent, constructive dialogue with their insurer and/or broker as helpful when it came to policy renewal. We are keeping the availability of PII in this market under close review.

All firms are required to hold appropriate financial resources. A firm may need to hold financial resources above the minimum amounts specified in our rules to show it holds appropriate levels of financial resource in light of its particular circumstances. 

We have seen evidence of owners reducing the financial resources of their firms by withdrawing assets or changing their corporate structure in order to avoid liabilities. We will take action where we are concerned that that this could leave a firm with inadequate financial resources and unable to rectify instances of poor advice.

Suitability

We reported in June 2019 that we had started visits to firms based on data submitted to us in October and November 2018. This data request was sent to all firms with the permission to advise on DB transfers and provided us with a picture of the risk of unsuitable advice at each firm, enabling us to select firms for further work.

The focus of our latest work has primarily been on the most active firms in the market. To assess the 85 firms, responsible for 43% of DB transfers between April 2015 and September 2018, we first used a combination of desk-based reviews and visits to identify those firms more likely to be providing unsuitable advice. Following that assessment, we requested initial file samples from 55 firms. These focused primarily on advice to transfer. Our review of these samples provided us with evidence about the quality of these firms’ advice. 

The table below presents the results of our detailed review of the initial samples of client files provided to us by the 55 firms, alongside our previously published findings. Following our review, which is phase 4 of our work, the proportions of suitable and unsuitable advice, and cases containing MIGs appear to be:  

 

2015

2016

2017

2018

2019

Date of advice not recorded

Total
files

Total

Phase 1 & 2

No. files

88

 

 

 

 

88

 

Suitable

47%

 

 

 

 

41

47%

MIGS

36%

 

 

 

 

32

36%

Unsuitable

17%

 

 

 

 

15

17%

Phase 3

No. files

 

 

154

 

 

154

 

Suitable

 

 

48%

 

 

74

48%

MIGs

 

 

23%

 

 

35

23%

Unsuitable

 

 

29%

 

 

45

29%

Phase 4

No. files

22

63

154

127

10

1

377

 

Suitable

73%

55%

47%

60%

80%

0%

208

55%

MIGs

23%

29%

33%

23%

20%

100%

106

28%

Unsuitable

4%

16%

20%

17%

0%

0%

63

17%

While we found some improvement in the quality of advice over time, with 60% of the advice we reviewed from 2018 being reviewed as suitable, the level of suitable advice overall is well below our objective for this market. 

We required some firms to provide additional file samples for review to support firm-specific decision-making and action. We are currently undertaking 30 enforcement investigations arising from concerns identified during our programme of DB transfer supervisory work, including the most recent work described above. We have now reviewed samples of advice for each firm under investigation, which will inform our decision-making, and help us to conclude those investigations.     

We continue to engage with individual firms about the results of our ongoing review. We have seen many examples of good practice and advice. However, we have seen too much unsuitable or non-compliant advice.  Where we have identified unsuitable advice we expect firms to review the DB transfer advice they have provided and put things right. 

We reviewed files according to a specifically designed methodology, which we intend to publish in due course to assist firms in reviewing complaints.

As part of our work, including file reviews undertaken to progress enforcement investigations and other firm-specific work, we reviewed 192 instances of advice to former BSPS members. Of these, 40 (21%) appear to be suitable, 91 (47%) appear to be unsuitable and 61 (32%) appear to be MIGs.

Action taken

Preventing future harm

In addition to the 85 firms assessed, 1,649 firms received detailed feedback on areas of practice they needed to review in their advice model. This included the volume of clients being recommended to transfer, use of unauthorised introducers and the recommendation of expensive solutions. We also asked firms to put things right if they found advice that was not suitable.

We found that 387 firms had not given DB transfer advice since April 2015. Where firms had not given DB transfer advice we asked these firms to show that they had kept their knowledge and experience up to date and were maintaining compliant PII cover if they wished to remain in the market. This resulted in 311 firms giving up their DB advice permissions.

After writing to the 1,649 firms, 402 firms chose to vary their permissions and they will not be advising on DB transfers in future.

As a result of our visits and desk-based reviews, 32 firms stopped providing DB transfer advice.

Overall, 745 firms amended their permission because of our interventions.

Consumer information

We are continuing to undertake work with The Pensions Regulator, Money and Pensions Service (MaPS), Financial Ombudsman Service (FOS) and Financial Services Compensation Scheme (FSCS) to ensure pension-holders understand the risks attaching to pension transfers. We also wish to ensure that those who have previously transferred out of DB pension schemes understand what the advice process should have looked like, and are equipped to complain if they have any concerns about advice they received. 

So we have published an Advice Checker, which will help consumers who have received DB transfer advice to decide if that advice was likely to have been suitable, and whether they should make a complaint.

 

Next steps

This update shows that standards of advice across the industry are improving, but still well below the level we wish to see. The next steps we will take include:

  • Engaging with all firms where we assessed advice processes and/or reviewed files. Where firms have not met our standards, we expect them to put things right, including carrying out past business reviews and paying redress.
  • Conclusion of enforcement investigations using evidence obtained in the course of our recent file reviews to inform our decision-making.
  • The Trustee of the BSPS has provided us with the contact details for around 7,700 former members who transferred out of the BSPS during the ‘Time to Choose’ exercise. We will be writing to all these former members to help them revisit the advice they received, and complain if they have concerns.
  • Further supervisory assessing of firms in other segments of the market, informed by information obtained through a further data request.
  • Issuing a further data request to all firms with the pension transfer permission, which will help to inform where we target our assessments.